Bloomberg News

Treasuries Decline on Inflation Outlook; Two-10 Spread Widens

July 06, 2011

July 6 (Bloomberg) -- Treasuries declined and the spread between 30-year bonds and two-year notes approached a record on speculation inflation will quicken as the economy improves.

The difference in yield expanded to 3.96 percentage points, the widest in five months, and nearing the 4.02 percentage point level on Feb. 1 that was the most in Bloomberg data going back to 1977. The spread between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, was 2.35 percentage points, versus the 10- year average of 2.11 points.

“I expect yields to keep rising at a moderate pace,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “The U.S. economy is on a recovery track.”

The 10-year yield rose three basis points to 3.15 percent as of 7:01 a.m. in London, according to Bloomberg Bond Trader prices. The 3.125 percent note due May 2021 fell 7/32, or $2.19 per $1,000 face amount, to 99 26/32. The yield, which has climbed from this year’s low of 2.84 percent on June 27, is still below the decade-long average of 4.07 percent.

Two-year notes, which are anchored by the Federal Reserve’s target for overnight bank lending because of their short maturity, yielded 0.44 percent, compared with 4.40 percent for 30-year bonds. The central bank has kept its target in a range of zero to 0.25 percent since 2008.

Rate Forecast

Ten-year rates will advance to 3.62 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. Shimazu predicts 3.8 percent.

The Thomson Reuters/Jefferies CRB index of 19 raw materials rallied 1.5 percent yesterday, the most in a week, adding to inflation concerns.

U.S. employers hired 100,000 workers last month, after adding 54,000 in May, according to economists surveyed by Bloomberg News before the Labor Department report July 8. The jobless rate held at 9.1 percent, the analysts predicted.

Japan’s 10-year bonds yielded 1.17 percent, matching a two- month high. Prime Minister Naoto Kan said today that a “considerable” amount of government bonds will need to be issued to fund rebuilding from the March earthquake and tsunami.

Fed Buying

The Fed is scheduled to buy $2.5 billion to $3.5 billion of Treasuries due from January 2014 to June 2015 today, according to its website. The Fed completed its planned $600 billion of debt purchases. It’s now reinvesting the principal payments from its debt holdings as part of its efforts to cap borrowing costs.

Ten-year notes may draw demand after their yields climbed to 3.22 percent on June 1, the most in six weeks, said Tsutomu Komiya, who helps oversee the equivalent of $114.5 billion as an investor in Tokyo at Daiwa Asset Management Co., a unit of Japan’s second-biggest brokerage by market value.

Yields climbed past their 200-day moving average, now 3.15 percent, at the end of June. They retreated to below the barrier, which Komiya identified as a resistance level, this week.

“Some people think this level is attractive,” Komiya said. His own view is that bond yields are poised to climb this year, he said.

Bill Rates

Treasuries rose yesterday, pushing rates on three-month bills below zero for the first time since 2008, after Moody’s Investors Service cut Portugal’s bond rating to junk status and a report showed deteriorating credit prospects for China’s banks.

Moody’s reduced Portugal’s long-term ratings to Ba2, two levels below investment grade. The reductions stem partly from “the growing risk that Portugal will require a second round of official financing before it can return to the private market,” Moody’s said in a statement.

The nation joined Ireland and Greece in turning to the European Union and the International Monetary Fund for a bailout after their budget deficits ballooned.

Moody’s also said yesterday that Chinese bank loans to local governments are about 3.5 trillion yuan ($541.1 billion) more than the national audit office’s estimate, and the industry’s credit outlook may decline.

Three-month Treasury bill rates tumbled to negative 0.0051 percent in their first decline below zero since December 2008.

The Fed said June 22 that it expects the recovery to pick up after ebbing in the second quarter. An industry report today will show service industries in the U.S. expanded at a slower pace in June, according to Bloomberg surveys.

Growth in the world’s largest economy will quicken to 3.2 percent in the July-to-September period, the fastest pace since the first three months of last year, another survey showed.

--With assistance from Susanne Walker in New York. Editors: Nicholas Reynolds, Nate Hosoda

To contact the reporter on this story: Wes Goodman in Singapore at; Monami Yui in Tokyo at

To contact the editor responsible for this story: Rocky Swift at

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