Bloomberg News

Treasury Yields Touch Highest in 3 Months Amid Economic Gains

August 16, 2012

Treasury 10-year yields touched the highest in more than three months as U.S. economic data pointed to improvement in the U.S. economy, curbing demand for the relative safety of U.S. sovereign debt.

U.S. debt was little changed after the Labor Department reported weekly jobless claims was little changed last week and the Commerce Department said housing starts declined in July while remaining close to the most since 2008. The Federal Reserve is scheduled to buy as much as $2 billion of Treasuries due from February 2036 to August 2042 today as part of the program, according to the Fed Bank of New York website.

“People had begun to be sold on the story that we had a turnaround on the way,” said James Collins, an interest-rate strategist in the futures group at Citigroup Inc. in Chicago, one of 21 primary dealers that trade with the Fed. “I don’t know how much more we have to run” toward higher yields.

The benchmark 10-year yield was little changed at 1.80 percent at 8:50 a.m. New York time, according to Bloomberg Bond Trader data. It was as high as 1.86 percent, the most since May 11, and dropped as much as one basis point to 1.81 percent. The price of the 1.625 percent security due in August 2022 was 98 14/32.

Key Level

The 10-year yield may struggle to breach 1.86 percent, its 200-day moving average, according to data compiled by Bloomberg. The yield fell below its 200-day moving average on April 6.

The U.S. added 163,000 jobs last month, a government report showed on Aug. 3, more than the 100,000 projected by analysts. Retail sales rose 0.8 percent, the biggest increase since February, Commerce Department figures showed Aug. 14. Industrial production increased 0.6 percent in July from June, the Federal Reserve reported yesterday.

Treasuries have handed investors a 1.6 percent loss this month, according to Bank of America Merrill Lynch data. An index of sovereign bonds around the world dropped 0.6 percent, the data show.

The MSCI All-Country World Index (MXWD) of stocks returned 2.4 percent including reinvested dividends, according to data compiled by Bloomberg.

Improvement in the economy is damping speculation the Fed will expand stimulus as soon as its Sept. 12-13 meeting.

No Recession

Dallas Fed President Richard Fisher yesterday told CNBC the U.S. economy probably won’t lapse into recession in 2013 and that new stimulus wouldn’t spur growth.

The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing to cap borrowing costs. It’s now in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long- term borrowing costs.

The U.S. is set to announce today how much it plans to raise in a sale of five-year Treasury Inflation Protected Securities Aug. 23.

The auction will probably be for $14 billion, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey. The last sale of the securities was for $16 billion on April 19.

An index of TIPS has declined 2.1 percent this month, based on the Bank of America figures. The U.S. consumer-price index rose 1.4 percent in July from the year before, the smallest increase since November 2010, Labor Department data yesterday showed.

Inflation Measure

The difference between yields on 10-year notes and same- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, was 2.27 percentage points. The average over the past decade is 2.15 percentage points.

Investors received 1 percent of additional yield by buying 10-year notes in the U.S. instead of Japan. The difference was the most since May.

Japan, which has purchased almost five times the amount of Treasuries as China in 2012, is on course to overtake the world’s most populous country by year-end as the largest creditor to the U.S.

Investors in Japan bought $10.4 billion of Treasuries in June, bringing purchases for 2012 to $61.3 billion and total holdings of the debt to $1.1193 trillion, Treasury data yesterday showed.

China Buys

China added $300 million to its portfolio of U.S. government securities for the month, raising its purchases this year to $12.4 billion and its stake in Treasuries to $1.1643 trillion.

Should both countries continue buying at their respective paces through 2012, Japan will end the year with more Treasuries.

The number of Americans filing applications for unemployment benefits brought the average during the past month to the lowest level since late March, a sign the labor market has stabilized after employment picked up in July.

Jobless claims climbed by 2,000 to 366,000 in the week ended Aug. 11, Labor Department figures showed today in Washington. The median forecast of 45 economists surveyed by Bloomberg News called for an increase to 365,000. The four-week moving average, a less volatile measure, dropped to 363,750, the fewest since the week ended March 31.

Housing starts fell 1.1 percent to a 746,000 annual rate from June’s 754,000 pace, Commerce Department figures showed today in Washington. The median estimate of 79 economists surveyed by Bloomberg News called for 756,000. Building permits, a proxy for future construction, rose to an 812,000 pace, the most since August 2008.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

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


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