BLBG:Treasuries Advance as Lacker Sees Slow Growth Before Job Report
Treasuries rose for a second day as Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank isn’t close to decreasing its balance sheet as officials debate the possibility of scaling back stimulus.
Benchmark 10-year notes extended a gain from yesterday when yields fell the most in almost two weeks. Fed Bank of New York President William C. Dudley will speak to reporters today on the labor market, while economists say U.S. reports will show consumer spending rose and jobless claims declined. The Treasury will sell $29 billion of seven-year securities. Bill Gross at Pacific Investment Management Co. said investors shouldn’t panic about be the recent increase in Treasury yields.
“While there is still a lot of uncertainty in terms of data, given the Treasury yields have backed up massively in recent weeks we see a short-term opportunity to buy,” said Adrian Owens, an investment director at GAM U.K. Ltd., which manages the equivalent of $81 billion. “Longer-term, our view is that yields are likely to be higher. Growth may remain sluggish, but the bigger picture here is that of improvement.”
The 10-year yield fell four basis points, or 0.04 percentage point, to 2.50 percent at 8:21 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2023 rose 11/32, or $3.44 per $1,000 face amount, to 93 1/2. The yield dropped seven basis points yesterday, the biggest decline since June 13.
Fed Buying
The Fed is buying $85 billion of Treasuries and mortgage-backed securities every month to put downward pressure on borrowing costs during the third round of its quantitative-easing program.
“This asset-purchase tapering is just slowing the rate at which we’re increasing the balance sheet,” Lacker, who doesn’t vote on the Fed’s Open Market Committee this year, said yesterday in a Bloomberg Television interview with Peter Cook. “We’re not anywhere near decreasing the balance sheet yet.”
Fed Chairman Ben S. Bernanke said on June 19 that policy makers may slow stimulus this year and end it entirely in mid-2014. Speaking after the FOMC’s two-day meeting, he said tapering the purchases would depend on economic growth being in line with the Fed’s estimates.
Treasuries handed investors a loss of 1.8 percent this month through yesterday, according to the Bloomberg U.S. Treasury Bond Index. (BUSY) The MSCI World Index of shares declined 3 percent in the same period, including reinvested dividends. Investment Management Co.
‘Don’t Panic’
Gross, manager of world’s largest mutual fund at Newport Beach, California-based Pimco, said global markets are reducing risk because of speculation about the Fed’s policy.
Gross’s $285 billion Pimco Total Return Fund led declines among the most-popular bond mutual funds earlier this month after the Fed sparked a global selloff in bonds by indicating it may start reducing asset purchases known as quantitative easing.
“In trying to be specific about which conditions would prompt a tapering of QE, the Fed tilted overrisked investors to one side of an overloaded and overlevered boat,” Gross said in his July commentary titled “The Tipping Point,” posted on Pimco’s website. “Don’t panic,” he wrote.
U.S. personal spending rose 0.3 percent in May, the biggest increase in three months, according to the median estimate of economists surveyed by Bloomberg News before the Commerce Department data. Applications for unemployment benefits fell by 9,000 to 345,000 last week, a separate survey showed.
Inflation Data
Economists predict another Commerce Department report today will show a measure of consumer-price inflation favored by the Fed increased 1.1 percent in May from a year earlier. The core personal-consumption-expenditure price index was at the same level in April, matching the smallest increase according to data going back to 1960.
“Consumer prices won’t rise much globally,” said Kiyoshi Ishigane, a senior strategist in Tokyo at Mitsubishi UFJ Asset Management Co., which oversees more than $72 billion. “If prices don’t rise, then the bond market is subject to a correction. Yields will struggle to advance.”
The difference in yield between 10-year notes and Treasury Inflation Protected Securities, a measure of expectations for inflation over the life of the securities, was little changed at 1.95 percentage points after shrinking to 1.81 percentage points on June 24, the narrowest since October 2011.
The seven-year notes scheduled for sale today yielded 1.94 percent in pre-auction trading, compared with 1.496 percent at the previous sale of the securities on May 30. Investors bid for 2.7 times the amount of available debt last month, versus 2.71 times in April.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobsob2@bloomberg.net
