BLBG: Treasuries Drop as Stock-Market Gains Reduce Demand for Safety
By Lukanyo Mnyanda
Dec. 21 (Bloomberg) -- Treasuries declined for a second day as stock markets gained on optimism the economic recovery is strengthening, fueling inflation and sapping demand for the relative safety of bonds.
The losses pushed the 10-year yield to within three basis points of its highest level this month as prices of commodities such as copper climbed. Bonds also slipped before reports this week that economists say will show gross domestic product expanded in the third quarter and consumer spending grew.
“We could see more growth prospects being factored into the market, and that will put pressure on Treasuries,” said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment-banking arm of Credit Agricole SA. The 10-year yield may rise above 4 percent by the end of March, he said.
The yield on the benchmark 10-year note climbed 5 basis points to 3.59 percent as of 10:31 a.m. in London, according to BGCantor Market Data. The 3.375 percent security due November 2019 fell 13/32, or $4.06 per $1,000 face amount, to 98 8/32. The yield fell 1 basis point last week. The two-year yield rose 4 basis points to 0.82 percent.
The moves left the yield difference, or spread, between the securities at 276 basis points today, from 253 basis points at the end of last month, according to data compiled by Bloomberg. It widened last week to the most since June 5 as investors bought shorter-dated notes on speculation policy makers will keep interest rates at a record low.
Spending Report
A Commerce Department report on Dec. 23 will show consumer spending rose 0.7 percent in November, the same as the previous month, according to the median estimate of 60 economists in a Bloomberg survey. The National Association of Realtors will probably say tomorrow that purchases of existing homes rose in November to an annual pace of 6.25 million, the highest level since February 2007, according to a separate survey.
“Household spending appears to be expanding at a moderate rate,” the Federal Open Market Committee said in a statement on Dec. 16 after its meeting.
European stocks gained, propelling the Dow Jones Stoxx 600 Index toward its steepest annual increase in a decade. U.S. stock-index futures advanced, while most Asian shares fell.
Treasury bears say yields are likely to climb as rising commodity prices spur concern inflation will increase in the coming months. A survey of investors by Ried, Thunberg & Co. showed fund managers remained bearish on Treasuries.
The company’s index measuring the outlook through the end of March was little changed at 43, from 42 last week. A figure below 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 22 fund managers controlling $1.39 trillion.
Yield Gap
Copper for three-month delivery gained $72.25, or 1.1 percent, to $6,917.25 a metric ton at 10:12 a.m. on the London Metal Exchange. Prices rose 0.2 last week. Oil prices also climbed last week after Iraq’s National Security Council said that Iran violated their shared border and Iraq’s “territorial integrity.” Oil traded at $73.38 per barrel today.
The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points for four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation, not deflation in coming months, said Jay Moskowitz, head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut.
Inflation Outlook
Fed Chairman Ben S. Bernanke has cited a tame inflation outlook for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent. TIPS show the improving economy may change sentiment and spark further bond declines. Yields on the benchmark 10-year Treasury note reached a four-month high of 3.62 percent last week.
“It could be an environment where we see 4 percent on 10- year yields, which we think is probably likely in the near term,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 18 primary dealers of U.S. government securities that trade with the Fed.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
