BLBG:Treasuries Snap Three-Day Advance Before Retail-Sales Report
Treasuries fell, snapping a three-day gain, before a report tomorrow that economists said will show U.S. retail sales increased for a fourth consecutive month in July, adding to signs the economy is improving.
The 10-year break-even rate, a measure of market inflation expectations, was about one basis point from a 10-week high before separate reports analysts said will show costs rose last month. Longer-maturity Treasuries, those most sensitive to inflation, are the world’s worst-performing bonds over the past year. Treasury trading volume dropped to the lowest this year on Aug. 9, according to ICAP Plc.
“We’re only looking for a modest selloff on Treasuries going forward,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There’s still a lot of doubt in terms of the economic recovery, globally there’s a lot of uncertainty, so the market will be circumspect.”
Benchmark 10-year yields rose one basis point, or 0.01 percentage point, to 2.59 percent as of 9:25 a.m. in London, according to Bloomberg Bond Trader data. The yield had dropped six basis points in the past three sessions. The price of the 2.5 percent note due in August 2023 fell 1/8, or $1.25 per $1,000 face amount, to 99 6/32.
Credit Agricole’s Green said he expects 10-year Treasury yields to reach 2.85 percent by the end of the year.
Sales Increase
Retail sales climbed 0.3 percent last month after a 0.4 percent advance in June, according to the median forecast of 64 economists surveyed by Bloomberg before the Commerce Department releases the figures.
“Forward-looking indicators have been particularly positive, and if that translates to harder data, in particular the jobs data, then clearly there is a strong argument for yields to be under pressure going forward,” Credit Agricole’s Green said.
U.S. notes and bonds due in a decade or longer fell more than 10 percent in the past 12 months, the biggest loss of 144 debt indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies.
The Federal Reserve is buying $85 billion of Treasuries and mortgage debt each month to put downward pressure on interest rates. Policy makers are discussing whether the economy has improved enough for them to start reducing the purchases.
Producer prices rose 2.4 percent in July from the year before, versus 2.5 percent in June, based on a Bloomberg News survey of economists before the Labor Department reports the number on Aug. 14. Consumer prices advanced 2 percent, quickening from 1.8 percent, according to the surveys. The department is scheduled to report the figure on Aug. 15.
Inflation Target
The Fed’s inflation target is 2 percent. The personal consumption expenditure deflator, the central bank’s preferred gauge, rose to 1.3 percent in June from a year earlier.
“The market’s pricing in an ongoing recovery” in the economy, said Peter Jolly, the Sydney-based head of market research for National Australia Bank Ltd., the nation’s biggest lender as measured by assets. “Treasuries will underperform. For now, inflation is pretty benign.”
The difference between yields on U.S. 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt was 2.27 percentage points today, after touching 2.28 on Aug. 9, the most since May 29.
The five-year five-year forward break-even rate, the Fed’s measure of traders’ forecasts for prices in the economy from 2018 to 2023, was 2.73 percent as of Aug. 6, the most since May 28. It gained from this year’s low of 2.33 percent in June. The average over the past decade is 2.75 percent.
‘Low Levels’
“Inflation indicators are at very low levels,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank by market value. “However the direction of inflation is that it is picking up. The retail sales numbers won’t be too bad. I think they will indicate that the U.S. economy continues to recover.”
Thin markets because of August vacations may make prices volatile, he said.
Treasury trading volume at ICAP, the largest inter-dealer broker of U.S. government debt, was $147.8 billion on Aug. 9, the lowest level in 2013. Volume this year has averaged about $313 billion.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net
To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net
