Bloomberg News

Treasury Inflation Bets Near Three-Month Low Before Debt Auction

April 10, 2013

Treasuries investors’ expectations for U.S. inflation were near a three-month low, supporting the Federal Reserve’s decision last month to continue its asset- purchase program to stimulate growth.

Fed Bank of Atlanta President Dennis Lockhart will discuss the economy and monetary policy with reporters today as the central bank releases minutes of its March 19-20 meeting. The gap between yields on 10-year notes and inflation-linked securities -- the so-called break-even rate -- was at 2.444 percentage points after touching 2.438 yesterday, the least since Jan. 2. The government will auction 10-year notes today.

“Declines in the break-even rate reflect rising concern about the U.S. economic outlook, as well as the slowdown in inflation,” said Shinichiro Kadota, a strategist for non-yen debt in Tokyo at Barclays Plc. “I expect the 10-year auction to go smoothly because demand for safe assets remains strong.”

The yield on the benchmark 10-year note was little changed at 1.76 percent as of 8:21 a.m. London time. The 2 percent security due in February 2023 traded at 102 6/32, Bloomberg Bond Trader prices showed.

Japan’s bonds declined, led by longer-maturity debt, with 30-year yields gaining seven basis points to 1.45 percent. Ten- year yields rose seven basis points to 0.60 percent, according to Japan Bond Trading Co., the nation’s largest inter-dealer debt broker. The rate on two-year securities advanced two basis points to 0.13 percent.

Import Prices

The U.S. Labor Department will say tomorrow that the import-price index fell 0.5 percent in March from February, according to the median estimate of 40 economists in a Bloomberg News survey. That would be the first decline in three months.

The personal-consumption expenditure index deflator, the Fed’s favored inflation gauge, rose 1.3 percent from a year earlier in January and February, near the slowest pace since October 2009.

The Treasury will offer $21 billion of 10-year notes today, followed by a $13 billion sale of 30-year debt tomorrow. The shorter-term securities scheduled for sale today yielded 1.75 percent in pre-auction trading. Securities at a previous 10-year auction on March 13 yielded 2.03 percent, the lowest since January.

Investors bid for 3.19 times the amount of available debt last month, the highest bid-to-cover ratio since October. Indirect bidders, which include foreign central banks, bought 47.7 percent of the securities, the most since December 2011.

Benchmark Rate

The Federal Open Market Committee reiterated last month it will keep the benchmark rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation is for a rate of less than 2.5 percent. The central bank currently buys $85 billion of Treasury and mortgage debt a month to spur the economy by putting downward pressure on borrowing costs.

The “FOMC 19-20 March meeting minutes could hint at Fed purchases tapering off,” Ciaran O’Hagan, the head of European rates strategy at Societe Generale SA in Paris, wrote in a research note today. “Any suggestion of more tapering to come could prove hawkish.”

The benchmark 10-year yield will rise to 2.3 percent by year-end, according to a Bloomberg survey of economists with the most recent projections given the heaviest weightings. That would mean investors who buy 10-year notes today will lose 3.1 percent, according to Bloomberg data.

“In the next six months, yields are more likely to rise,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas SA. “When we start to see signs of economic recovery, the market will price-in possible unwinding of monetary easing by the Fed.”

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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