BLBG: Treasuries Poised for 1st Monthly Loss This Year on Fed Outlook
Treasuries were poised for their first monthly loss this year as consumer spending, which accounts for about 70 percent of the U.S. economy, climbed the most in three months.
Shorter-term borrowing costs rose after Federal Reserve Bank of Chicago President Charles Evans said the central bank will probably raise interest rates in the second half of next year. Policy maker have trimmed bond purchases at each of the past three meetings. The difference between five- and 30-year yields shrank to as little as 1.79 percentage points this week, the least since 2009.
“If you see some better data, you’re going to see some pressure on the short end and intermediate sector,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed. “With the potential for a rate hike, you’re going to see the curve continue to flatten. Given growth and inflation, there’s no reason to see” long-term bond prices fall.
The benchmark 10-year yield rose one basis point, or 0.01 percentage point, to 2.70 percent at 9:59 a.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.75 percent note due in February 2024 fell 3/32, or 94 cents per $1,000 face value, to 100 15/32.
The five-year note yield added one basis point to 1.73 percent, and the 30-year bond traded at 3.53 percent.
Consumer Spending
Household purchases climbed 0.3 percent after a 0.2 percent gain in January that was smaller than previously estimated, Commerce Department figures showed today in Washington. The median forecast of 79 economists in a Bloomberg survey called for a 0.3 percent gain. Incomes also increased 0.3 percent.
The Thomson Reuters/University of Michigan final index (BGSV) of sentiment fell in March to 80 from 81.6 a month earlier. The median projection in a Bloomberg survey of 63 economists called for 80.5 after a preliminary March reading of 79.9. Estimates ranged from 79.5 to 83.
“Unless there is a sharp slowdown in the U.S. economy, which is unlikely at this point, the Fed will continue with this pace of tapering,” said Axel Botte, a Paris-based strategist at Natixis Asset Management. “There is scope for yields to go up somewhat. The 10-year yields may push towards the 3 percent level by the end of June.”
The benchmark yield last touched 3 percent on Jan. 8 and has averaged 3.46 percent during the past decade.
Yellen’s View
Short-to-medium-maturity Treasuries tumbled last week after Fed Chair Janet Yellen said the central bank may end bond-buying this fall and lift borrowing costs six months later.
Fed board members cut the monthly bond purchases to $55 billion this month, from $85 billion in 2013. The central banks’s benchmark interest-rate target has been zero to 0.25 percent since 2008.
Today’s data also showed the core price measure, which excludes fuel and food, rose 0.1 percent in February from the prior month and was up 1.1 percent from a year ago, the same as in January.
“I do tend to think inflation’s going to pick up and that will be the reason why we ultimately raise rates,” Evans, who doesn’t vote on policy this year, said today in a Bloomberg Television interview with Betty Liu in Hong Kong. “It’s most likely to be in the second half of 2015. If I had my druthers, I’d wait a little bit longer than that.”
Monthly, Quarterly
Treasuries handed investors a loss of 0.1 percent in March, based on the Bloomberg U.S. Treasury Bond Index (BUSY), set for their first monthly decline since December. U.S. debt is up 1.9 percent on the year, the most since the quarter ending June 2012.
The Bloomberg Global Developed Sovereign Bond Index is little changed this month. It has risen 3 percent this year, the best quarterly performance in almost three years.
Wontark Doh, head of overseas fixed-income investment in Seoul at Samsung Asset Management Co., which manages the equivalent of $106 billion, said he’d consider buying Treasuries if the 10-year yield rises to 2.80 percent or 2.90 percent.
“There’s more probability of a bearish market in Treasuries,” he said. Samsung Asset Management is South Korea’s largest private bond investor.
Primary dealers had a net position of negative $5.2 billion in coupon-bearing Treasuries in the week ended March 19, according to a report yesterday by Ward McCarthy and Thomas Simons at Jefferies LLC in New York. It was the first net short position since September 2011, according to the report. Jefferies is one of the 22 primary dealers, companies that underwrite the U.S. debt.
‘I’m Bullish’
While Treasuries may fall later this year, there may be a rally at the start of April, said Weihan Chen, a bond trader at Hontai Life Insurance Co. in Taipei.
Some investors may buy as the month and the first quarter close to put the bonds and notes sold this year into their portfolios, Chen said. A 3.3 percent decline in new home sales reported earlier this week shows some areas of the economy are still “disappointing,” he said.
“I’m bullish in the short term,” he said, forecasting benchmark 10-year yields will fall to 2.60 percent in the first half of next week.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net
To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Kenneth Pringle, Paul Cox
