Treasury notes fell for a third week, the longest slump for benchmark 10-year securities this year, as traders bet inflation will accelerate, oil reached $113 a barrel and gold climbed to a record.
An inflation gauge used by the Federal Reserve reached the highest level in a month as minutes of the central bank’s last meeting showed policy makers differed over whether to begin removing record stimulus. Data next week is forecast to show the consumer price index rose in March. The Treasury will sell $66 billion of notes and bonds next week.
“The Fed’s acknowledging increasing inflation expectations,” said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, one of the 20 primary dealers that trade with the central bank. “That’s putting more pressure on yields. Momentum is going to be for higher rates.”
The 10-year yield rose 14 basis points, or 0.14 percentage point, to 3.58 percent, from 3.44 percent on April 1. It touched 3.61 percent, the highest level since Feb. 18. The 3.625 percent note due in February 2021 fell 1 1/8, or $11.25 per $1,000 face amount, to 100 3/8. Two-year note yields increased one basis point to 0.81 percent in their third weekly rise, the longest stretch since November.
Thirty-year bond yields climbed 16 basis points, the most since the week ended Feb. 4, to 4.64 percent. They touched 4.67 percent yesterday, the highest level since March 9.
Treasury Auctions
Treasuries also slid as the U.S. prepared to auction $32 billion of 3-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds in three daily sales starting April 12.
A bond-market measure of inflation expectations that the Fed uses to help determine monetary policy, the five-year forward inflation rate, increased to 3.01 percentage points, the most since March 8. The measure has averaged 2.78 percent over the past five years.
“Anticipation of inflation data and Treasury supply next week are sending Treasury yields even higher,” said Tom di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors.
The likelihood the Fed will boost interest rates this year is 36 percent, and the chance of one in the first quarter of 2012 is 70 percent, Federal funds futures contracts showed. The central bank has held the benchmark rate at zero to 0.25 percent since December 2008 to support the economy.
Dollar Slumps
The Dollar Index, which InterContinentalExchange Inc. uses to track the greenback versus the currencies of six major trading partners, sank to as low as 74.838 yesterday, the least since December 2009, as U.S. lawmakers struggled to reach a last-minute budget deal to avoid a government shutdown.
U.S. government debt gained 0.8 percent during the 21-day government closure at the end of 1995 and the start of 1996, Bank of America Merrill Lynch indexes show.
Fed policy makers were divided last month over whether to begin removing stimulus this year as they debated the path of policy after the completion of a $600 billion bond-purchase program, according to minutes of the March 15 meeting released this week. They have differed since then in public statements.
The Fed is “near a tipping point” and risks over- stimulating the economy and generating inflation, Dallas Fed President Richard Fisher said yesterday in Dallas to the Society of American Business Editors and Writers.
Atlanta Fed President Dennis Lockhart said the Fed should take its time in withdrawing economic stimulus amid moderate growth and a quickening of inflation that will probably prove temporary. The economy has “a halting and fragile quality,” he said in a speech yesterday in Knoxville, Tennessee.
‘Transitory’ Increase
Fed Chairman Ben S. Bernanke said on April 5 policy makers must watch inflation “extremely closely” for evidence that rising commodity costs are having more than a temporary impact on consumer prices. If inflation expectations are stable and the rise in commodities slows, “the increase in inflation will be transitory,” he said after a speech in Stone Mountain, Georgia.
The yield gap between 10-year Treasury Inflation Protected Securities and conventional U.S. notes, a gauge of trader expectations for prices over the life of the debt, reached 2.66 percentage points, the most since March 2008. The measure reached 2.74 percent in 2006 prior to the U.S. recession. It averaged 2.08 percent over the past five years.
The consumer price index accelerated to 2.6 percent in March from a year earlier, from 2.1 percent in February, economists in a Bloomberg News survey forecast before the Labor Department reports the data on April 15. The Fed’s preferred measure of inflation, which excludes food and energy, increased at an annualized 0.9 percent in February.
Crude Climbs
Crude oil for May delivery climbed above $113 a barrel in New York yesterday for the first time since September 2008 amid skepticism Libyan output will rebound when fighting ends and as a weaker dollar increased demand for raw materials. Gold reached $1,475.60 an ounce.
Treasuries also fell this week as the European Central Bank raised its main refinancing rate by a quarter-percentage point from 1 percent, where it had been since May 2009.
Six- and three-month bill rates dropped as the Treasury cut to $5 billion from $200 billion the amount of outstanding Supplementary Financing Program bills it sells on behalf of the Fed in a program to support the financial system. The reduction was made as the U.S. approaches its debt limit.
Six-month rates tumbled to a record 0.1048 percent. Three- month rates slid to 0.0203 percent, the lowest level since December 2009.
Treasury yields are below levels seen in the past decade even as government borrowing increases. Ten-year rates climbed as high as 5.53 percent in 2001 as traders speculated on when the Fed would finish cutting borrowing costs. The rate has averaged 4.12 percent over the past 10 years.
Source: Bloomberg By
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