BLBG:Treasuries Post Biggest Weekly Drop in Eight Months Amid Growth
Treasury (YCGT0025) 10-year notes capped the biggest weekly drop in eight months as a report showing the cost of living rose in February added to concern inflation may accelerate as the U.S. economy strengthens.
Derivative traders increased bets the Federal Reserve will lift its target rate for overnight loans a year earlier than Fed Reserve Chairman Ben S. Bernanke’s pledge of late 2014 after policy makers raised their assessment of the economy on March 13. The difference in yields between 10-year notes and Treasury Inflation Protected Securities climbed to 2.41 percentage points, the most since August, as investors sought a hedge against rising consumer prices.
“The data is strong enough not to warrant further assistance” from the Fed, said Sean Murphy, a trader in New York at Societe General SA, one of the 21 primary dealers that trade with the central bank. “I don’t think the backdrop is particularly supportive for Treasuries.”
The 10-year yield rose two basis points, or 0.02 percentage point, to 2.3 percent, at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due February 2022 dropped 4/32, or $1.25 cents per $1,000 face amount, to 97 12/32. The yield rose 27 basis points this week, the most since a 32 basis point increase in the period ended July 1.
Treasuries pared losses in late trading as the 14-day relative strength index for 10-year note yields indicated rates wouldn’t rise much further. The index was at 72.8. A reading of more than 70 suggests to some traders that rates may be about to reverse direction.
Fed Speculation
Federal Reserve Bank of Richmond President Jeffrey Lacker said yesterday that the central bank will probably need to raise interest rates next year to contain inflation.
While Fed policy makers refrained at their March 13 meeting from new actions to lower borrowing costs and said the U.S. labor market is gathering strength, they also reiterated a pledge to keep the benchmark interest rate at almost zero through at least late 2014.
Forward markets for overnight index swaps, whose rate shows what traders expect the federal funds effective rate to average over the life of the contract, signal a quarter-percentage advance in approximately the September and October 2013 period, according to data compiled by Bloomberg as of March 15. Last month, such an increase in the effective rate wasn’t predicted until early 2014. This year the effective rate has averaged 0.15 percentage point below the top end of the target range that the Fed reiterated three days ago.
‘Forward-Rate Structure’
“In the past few weeks, the market had been thinking the forward-rate structure it had priced in was too flat and had rates generally too low,” said Jim Lee, head of short-term markets and futures and options strategy in Stamford, Connecticut, at Royal Bank of Scotland Group Plc’s RBS Securities Inc. “There are still people thinking that this move is just beginning. However, it appears to me that it may be overdone.”
After the Fed’s March 13 statement, a measure of traders’ inflation expectations that the central bank uses to help determine monetary policy climbed to 2.56 percent on March 13 from its 2012-low of 2.37 percent March 5. The five-year, five- year forward break-even rate, which projects what the pace of price increases may be starting in 2017, hasn’t risen above 2.62 percent this year and is below the 2.76 percent average since 2002.
The consumer-price index climbed 0.4 percent in February, matching the median forecast of economists surveyed by Bloomberg News, after increasing 0.2 percent the prior month, the Labor Department reported today. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.1 percent, less than the 0.2 percent projected.
Inflation Expectations
Inflation “has been subdued in recent months although prices of crude oil and gasoline have increased lately,” the Fed said in its March 13 statement. The increase in oil will “push up inflation temporarily, but the committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.”
Even so, the difference between yields on 10-year notes and similar maturity TIPS, a gauge of expectations for consumer prices over the life of the debt, climbed one basis point to 2.4 percentage points after reaching 2.41 percentage points, the most since Aug. 2.
The central bank bought $2.3 trillion of securities in two rounds of so-called quantitative easing from December 2008 to June 2011 in a bid to boost the economy. The Fed sold $8.63 billion of Treasuries due in February 2014 to May 2014 today as part of its program to replace holdings of shorter-term securities with longer-term bonds.
Testing Support
Volatility in the Treasury market fell from a two-month high. Bank of America Merrill Lynch’s MOVE Index (MOVE), which measures price swings based on options, declined to 83.4 basis points yesterday after reaching 89.7 basis points on March 14, the highest since Jan. 3.
The 30-year bond is poised to test so-called support at 3.49 percent, which is a 38.2 percent retracement of the 2011 rally and chart peak, according to a note written today by Credit Suisse Group AG strategists David Sneddon in London and Chris Hine in New York, citing Fibonacci technical analysis.
Fibonacci analysis is based on the theory that securities tend to rise or fall by specific percentages after reaching a new high or low. A breach of one level often implies an extension of the move to the next. Support refers to an area where buy orders may be clustered.
Best Forecaster
Should the sell-off break through that cluster of potential buy orders, the next level where demand may be aggregated is at 3.59 percent, with 3.74 percent representing a 50 percent retracement, while resistance to a potential advance is pegged at 3.24 percent, Credit Suisse said.
Credit Suisse raised its year-end forecast on the 10-year note to 2.5 percent from 2.25 percent, said Ira Jersey, an interest-rate strategist with the firm in New York.
FTN Financial Chief Economist Christopher Low, the most accurate forecaster of Treasury note yields last year, said slowing U.S. economic growth will push 10-year yields down to 2.1 percent by year end.
“We actually expected interest rates would rise in the first and second quarter of this year,” said Low, who was the only one among 70 analysts in a Bloomberg survey who predicted the yield would fall to 2 percent by the end of last year. “People tend to start hiring more in the spring time, oil prices are high and there would be some inflation fears. We figured the employment data would probably stay strong up until May. After that, I don’t think it can be sustained.”
To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
