Bloomberg News

Treasury Yields Rise Amid Central-Bank Stimulus Wagers

July 13, 2012

Treasury 30-year bond yields rose from almost record lows amid speculation central banks around the world will take more action to stimulate the economy.

U.S. stocks gained, snapping the longest losing streak in almost two months for the Standard & Poor’s 500 Index (SPX) and lessening the allure of government debt, as slowing expansion in China fueled wagers policy makers there will boost stimulus measures. Treasuries fell after wholesale prices in the U.S. unexpectedly increased in June for the first time in four months, a government report showed.

“There’s a lot of concerns out there, and global growth is diminishing,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Federal Reserve. “The expectations of central banks helping out, doing something” to stimulate activity, are growing.

The 30-year bond yield rose one basis point, or 0.01 percentage point, to 2.57 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It fell to an all- time low of 2.5089 percent on June 1. The benchmark 10-year note’s yield rose one basis point to 1.49 percent after dropping to a record low 1.4387, also on June 1.

Treasury 10-year note yields will fall to 1.35 percent by the end of the year, according to Credit Suisse Group AG, a primary dealer.

“The risk-appetite rally has stalled,” Credit Suisse researchers wrote in a note today. “The market now must consider the real possibility of recession before the Fed even gets around to executing an exit strategy.”

‘Excessively Low’

The 0.1 percent gain in the producer price index followed a 1 percent decrease the prior month, Labor Department figures showed in Washington. The median estimate in a Bloomberg News survey of 70 economists called for a 0.4 percent fall. Excluding volatile food and energy, the so-called core measure increased 0.2 percent as projected.

Consumer prices were unchanged last month, after falling 0.3 percent in May, according to a Bloomberg survey of economists before the report on July 17.

“With yields at excessively low levels, it doesn’t take much of a catalyst to push yields higher,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in Fixed income assets. “It’s a response to the producer-price index numbers, which were higher than expected.”

ECB, Fed

China’s growth slowed for a sixth quarter to the weakest pace since the global financial crisis, putting pressure on Premier Wen Jiabao to boost stimulus to secure a second-half economic rebound.

U.S. notes headed for a third weekly advance after Moody’s Investors Service cut Italy’s debt rating, citing its deteriorating outlook.

The European Central Bank is prepared to ease monetary policy, including cutting its deposit rate further, if the region’s financial crisis worsens, according to a Medley Global Advisors report obtained by Bloomberg News.

The Fed has purchased $2.3 billion of mortgage and Treasury debt in two separate rounds of quantitative easing, or QE. Some Fed policy makers said the central bank will probably need to take more action “to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee’s goal,” according to the record of the Federal Open Market Committee’s June 19-20 gathering.

‘Economic Slowdown’

“All indications look like there’s an economic slowdown coming and Treasuries are still a good buy,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Europe reared its ugly head again today. That’s why we have people flocking toward Treasuries.”

The term premium, a model created by the Fed that includes expectations for interest rates, growth and inflation, showed Treasuries were at the most expensive level ever this week. The gauge fell to a record negative 0.9617 percent on July 10. It was negative 0.9273 percent today.

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.07 percentage points, versus 2.29 percentage points year ago.

The five-year, five-year forward break-even rate, a measure of inflation expectations that the Fed uses to guide monetary policy, was 2.43 percentage points as of July 10. The figure has dropped from 2012’s high of 2.78 percentage points set in March.

“We could be due for a bit of a relief selloff,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “But every selloff of late has been met by good buying.”

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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