Bloomberg News

Treasuries Snap Advance Before New Home Sales Report

March 23, 2012

Treasuries snapped a three-day gain before a U.S. report that economists said will show new home purchases climbed to the highest level in more than a year as the housing market stabilizes.

Ten-year yields are little changed this week, after climbing more than 30 basis points over the previous two weeks. The increase in yields is due to an improving economy and recognition the Federal Reserve is moving to “normalize” monetary policy, according to UBS AG. Fed Bank of St. Louis President James Bullard said the best time for the central bank to raise interest rates may be late 2013, a year earlier than currently planned.

“We see the data continuing to improve,” said Ralf Umlauf, head of floor research at Helaba Landesbank Hessen- Thueringen in Frankfurt. “Generally the move to higher yields will continue over coming weeks and months.”

The 10-year yield climbed one basis point, or 0.01 percentage point, to 2.29 percent at 8:41 a.m. London time, according to Bloomberg Bond Trader prices. The 2 percent note maturing in February 2022 fell 3/32, or 94 cents per $1,000 face amount, to 97 14/32.

Benchmark yields climbed to 2.4 percent on March 20, the highest level since October. They will probably rise back to 2.4 percent by the end of the second quarter and reach 2.6 percent by the end of September, Umlauf said.

Home Sales

Sales of U.S. new homes climbed 1.3 percent in February to a 325,000 annual pace, the fastest since December 2010, according to a Bloomberg News survey of economists before the Commerce Department report today.

“The U.S. economy is recovering,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “Investors will likely buy corporate bonds and stocks and get out of the Treasury market.”

Treasuries maturing in more than a year have lost 1.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The Standard & Poor’s 500 Index rose 11 percent in the same period.

“We regard the trend toward higher yields as a healthy development,” Andrew Cates in Singapore and Larry Hatheway and Christine Li in London, wrote yesterday in the report from UBS, one of the 21 primary dealers that trade with the Fed. “It reflects a healing process in the U.S. economy and recognition that the Fed will be able to normalize monetary policy earlier than many envisage.”

Close to Zero

The central bank repeated its view on March 13 that economic conditions will probably lead it to keep the benchmark interest rate close to zero at least through late 2014.

Ten-year Treasuries advanced for the previous three days as data showed signs of weakness in the biggest economies.

“The rise in yields is temporary,” said Hiromasa Nakamura, who invests in Treasuries at Mizuho Asset Management Co. in Tokyo, which has the equivalent of $39.7 billion in assets. “The unemployment and housing situations are very fragile” in the U.S.

Mizuho Asset Management favors Treasuries due in more than 10 years, the longest maturities that will rise most if yields fall, Nakamura said. Investors at the company predicted last year’s Treasury rally.

Treasuries gained yesterday after reports indicated euro- region output contracted and China’s manufacturing weakened, boosting the refuge appeal of U.S. government bonds.

Target Rate

U.S. policy makers have kept their target rate in a range of zero to 0.25 percent since December 2008. Two-year notes yield 11 basis points more than the upper end of the band. The spread was 14 basis points on March 20, rising past the five- year average of 13 basis points.

The Fed is due to buy as much as $2.25 billion of Treasuries maturing from 2036 to 2042 today as part of its plan to cap borrowing costs, according to the New York Fed’s website.

With policy currently “on pause, it may be a good time to take stock of whether we may be at a turning point,” Bullard said in a speech today in Hong Kong. “As the U.S. economy continues to rebound and repair,” further action “may create an overcommitment to ultra-easy monetary policy,” he said.

Chicago Fed President Charles Evans said the central bank needs to further ease monetary policy to fuel the U.S. economic expansion, in a speech yesterday in Washington. Bullard and Evans don’t vote on monetary policy this year.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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