BLBG: U.S. 2-Year Notes Little Changed After Industrial Production
By Susanne Walker and Anna Rascouet
Nov. 17 (Bloomberg) -- Treasury two-year notes were little changed after a Federal Reserve report showed industrial production in the U.S. rose less than forecast in October.
Two-year yields touched their lowest levels since January yesterday after Fed Chairman Ben S. Bernanke indicated in a speech that the extended period of low borrowing costs may get even longer. Output at factories, mines and utilities climbed 0.1 percent last month, below the 0.4 percent increase forecast in the median of a Bloomberg News survey.
“The market is reversing yesterday’s trend to some degree,” Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co., a St. Louis-based brokerage firm, said before the report. “Industrial production and capacity utilization take on added importance because the Fed singled them out in the most recent statement as data points they will watch to gauge slack in the economy.”
The two-year note yield traded at 0.77 percent at 9:24 a.m. in New York, according to BGCantor Market Data. It touched 0.76 percent yesterday, the lowest level since Jan. 23. The 1 percent security maturing in October 2011 was at 100 14/32.
Ten-year note yields declined three basis points to 3.37 percent.
Total foreign purchases of Treasuries rose $44.7 billion in September compared with purchases of $28 billion a month earlier. China remained the biggest foreign holder of U.S. Treasuries, after its holdings rose $1.8 billion to $798.9 billion. Japan, the second-largest holder, increased its holdings $20.3 billion to $751.5 billion.
Fed Success
Bernanke, who is trying to cap consumer borrowing costs as part of his efforts to spur growth, said yesterday that “banks’ reluctance to lend will limit the ability of some businesses to expand and hire.”
The Fed’s industrial production figures are due at 9:15 a.m. in Washington. Futures on the Chicago Board of Trade show just a 13 percent likelihood that the Fed will increase the target rate from the current range of between zero and 0.25 percent by March.
“The emphasis on low inflation and economic slack solidifies the message once again that the Fed’s dovish stance of a lower for longer policy with respect to rates is here to stay,” John Spinello, chief technical strategist in New York at Jefferies Group Inc., wrote in a note to clients. The firm is one of 18 primary dealers that trade with the Fed.
Yields indicate the Fed has had some success in curbing loan costs. U.S. 30-year fixed mortgage rates fell to 4.98 percent yesterday from this year’s high of 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida.
Prices Paid
Meanwhile, the variable interest rate on credit cards in the U.S. rose to 11.48 percent from this year’s low of 10.73 percent in March, Bankrate.com figures show.
Joblessness at a 26-year high is helping curb inflation, Labor Department figures may show this week.
Wholesale prices in the U.S. increased in October for just the second time in the past four months, indicating inflation will not be a concern for the Fed. The 0.3 percent increase in prices paid to factories, farmers and other producers was smaller than forecast and followed a 0.6 percent drop in September, according to Labor Department data released today in Washington.
The consumer price index, due tomorrow, increased 0.2 percent in October for a second month, the Bloomberg surveys show. Prices declined 0.3 percent from a year ago, according to the surveys.
‘Negative For Bonds’
“The market is data-driven, and worried about uncertainty,” said Gary Jenkins, head of credit research at Evolution Securities Ltd in London. “Clearly if the market sees data coming out that suggest a higher probability for inflation, this will be negative for bonds.”
The U.S. economy will grow at a 4 percent pace next year, said Joseph LaVorgna, chief U.S. economist at primary dealer Deutsche Bank Securities Inc. in New York. A Bloomberg survey of banks and securities companies projects 2.6 percent growth, following a 2.4 percent contraction in 2009.
Ten-year yields will climb to 5 percent by late next year, and corporate bonds will rally, he said.
“The economy stabilized,” LaVorgna said yesterday in an interview with Bloomberg Radio in New York. “Consumer spending will start growing.”
The cost to hedge against losses on Treasuries using credit-default swaps climbed to the highest level in almost four months, indicating investors are becoming less confident in U.S. securities. Swaps on U.S. government debt in euros for five years increased to 31.13 basis points yesterday, the highest level since July 24. That means it costs 31,130 euros ($46,500) a year to protect 10 million euros of debt.
The credit-default swaps rose yesterday and on Nov. 13, climbing six basis points over the period. It was the biggest two-day increase since May.
Treasuries have handed investors a 2.5 percent loss this year as the economy showed signs of reviving, indexes compiled by Bank of America’s Merrill Lynch unit show.
To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net. Anna Rascouet in London arascouet@bloomberg.net
