BLBG: U.S. 10-Year Notes Little Changed After Fed as Oil Increases
By Cordell Eddings
Dec. 19 (Bloomberg) -- Treasury 10-year notes were little changed as the Federal Reserve pledged to keep interest rates near zero and rising commodity prices spurred concern inflation will increase in coming months.
Treasury 10-year notes declined yesterday as crude oil rose after Iranian forces entered Iraq and occupied an oil well. The U.S. dollar posted its biggest weekly gain against the euro since October amid concern Greece and other European nations may struggle to pay their debts. Consumer spending rose 0.7 percent in November, according to the median estimate in a Bloomberg survey before a Commerce Department report Dec. 23.
“The market took its direction from flows after the FOMC announcement,” said Ian Lyngen, senior government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The announcement was more upbeat on growth than in the past, but still, the extended period language is still there. The big take-away is we are in a range until the facts change.”
The yield on the 10-year note fell one basis point on the week, or 0.01 percentage point, to 3.54 percent, according to BGCantor Market Data. The 3.375 percent security due November 2019 rose 2/32, or 63 cents per $1,000 face amount, to 98 20/32. Treasuries have lost investors 2.2 percent this year through Dec. 17, according to Bank of America Corp. Merrill Lynch indexes.
Fed officials said on Dec. 16 after the conclusion of their two-day policy meeting that the U.S. economy isn’t improving enough for them to raise interest rates and that rates would remain ‘exceptionally low” for an “extended period.”
‘Sword of Damocles’
“They’ve got the Sword of Damocles hanging over them,” Richard Schlanger, who helps invest $13 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “They’re not going to move until the indicators are definitely pointing that there is inflation concern and the economy really has sustained growth momentum and unemployment is going to come down significantly.”
Ten-year note yields fell on Dec. 17 as much as 13 basis points, the most since Oct. 1, after the number of Americans filing initial jobless claims rose by 7,000 to 480,000 in the week ended Dec. 12. Economists surveyed by Bloomberg forecast a drop to 465,000.
“The bias is for lower yields,” said Sergey Bondarchuk, an interest-rate strategist in New York at primary dealer BNP Paribas. “We have a more certain outlook after the Fed restated low rates for longer, which continues to give support to the front end. The weakness in the long end should be contained.”
Positioned Tanks
Fed Chairman Ben S. Bernanke said on Dec. 7 that conditions warranting a low interest rate have not changed even as a Labor Department report on Dec. 4 showed the jobless rate fell to 10 percent in November from a 26-year high of 10.2 percent the previous month.
The U.S. is still in a recession and home prices may resume declines, Harvard University economics professor Martin Feldstein said.
“The recession isn’t over,” Harvard’s Feldstein said Dec. 17 in an interview on Bloomberg Radio in New York. “It will be a while before we have enough information to know if the recession ended.”
Crude oil for January delivery rose as much as 2.8 percent yesterday as Iraq’s National Security Council said that Iran violated their shared border and Iraq’s “territorial integrity.” Iranian forces entered Iraq on Dec. 17. and occupied a well in the East Maysan oil field.
Crude Oil
“Oil prices have spiked some as a result of political intrigue, which leads to inflation expectation concerns,” said Eric Lascelles, chief rates strategist and economist at TD Securities Inc. in Toronto. “The Fed earlier this week indicated that they weren’t concerned about inflation, but you still had inflation data in general coming in higher than expected.”
The yield spread between 10-year notes and Treasury Inflation Protected Securities, a gauge for price-growth expectations, rose to 231 basis points this week, the most in 16 months.
Ten-year yields on Dec. 15 touched their highest levels since August after a report showed a 1.8 percent increase in prices paid to factories, farmers and other producers, more than twice as large as anticipated.
Investors sought the relative safety of government debt after Standard & Poor’s cut Greece’s credit rating on Dec. 16.
‘Too Much Money’
“Sovereign nations have borrowed too much money with relation to GDP, so that’s what’s impacting the ratings agencies downgrade,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., cut holdings of government debt and boosted cash to the most since Lehman Brothers Holdings Inc. collapsed in September 2008.
Gross increased cash in the $199.4 billion Total Return Fund to 7 percent in November, from a negative 7 percent in October, according to Newport Beach, California-based Pimco’s Web site. The fund can have a so-called negative position by using derivatives, futures or by shorting. He reduced government-related securities to 51 percent from a five-year high of 63 percent in October.
To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net
