BLBG: Treasury 10-Year Yields Near Weekly High on Fed Outlook Upgrade
By Theresa Barraclough and Paul Dobson
Jan. 28 (Bloomberg) -- Treasury 10-year yields climbed to the highest in a week as signs of rising confidence in the economic recovery boosted stocks and curbed demand for fixed- income assets.
The securities fell yesterday after the Federal Open Market Committee upgraded its economic outlook. Kansas City Federal Reserve President Thomas Hoenig dissented from the pledge to keep interest rates at a record low for an “extended” period, favoring a quicker adjustment. President Barack Obama called on Congress to pass a package of tax cuts and spending, prompting stocks to extend gains. Reports today may show durable goods orders rose in December and fewer Americans sought jobless benefits last week.
“Yields have moved too low compared to where we see growth and inflation,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse AG in Zurich. Fed policy makers “are getting more confident that the stabilization measures are working and they see the economy is now strengthening again.”
The yield on the benchmark 10-year note rose 1 basis point to 3.66 percent at 10:40 a.m. in London, according to BGCantor Market Data. The yield climbed earlier to 3.70 percent, the highest since Jan. 20. The 3.375 percent security due November 2019 fell 2/32, or 63 cents per $1,000 face amount, to 97 21/32.
Durable Goods
Bookings for durable goods rose 2 percent last month after dropping 0.7 percent in November, according to the median estimate of economists surveyed by Bloomberg News. The Labor Department will say initial jobless claims fell to 450,000 last week from 482,000 in the prior seven days, a separate survey showed. Both reports are due for release today.
The world’s biggest economy expanded at a 4.6 percent annual rate in the final quarter of last year, according to economists surveyed by Bloomberg. The government will release its advance report on gross domestic product tomorrow.
“With labor market improvement, people may start wondering about when the Fed will hike” borrowing costs, said Hideo Shimomura, who helps oversee the equivalent of $56 billion as chief fund investor in Tokyo at Mitsubishi UFJ Asset Management Co., a unit of the world’s biggest bank by assets.
Traders saw 52 percent odds that the Fed will leave its target for overnight lending between banks unchanged through June, according to futures on the Chicago Board of Trade. That’s down from a 56 percent chance a week ago and higher than the 37- percent odds a month ago.
‘Surprise’
Hoenig “believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted,” according to yesterday’s Fed statement. The panel declared for the first time the U.S. economy is in “recovery” and took steps to prepare investors for the removal of aggressive monetary stimulus.
“What was said by the Fed board was a surprise for the market,” said Orlando Green, assistant director of capital markets strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “That’s playing into higher yields.”
The MSCI Asia Pacific Index of regional shares advanced 0.8 percent and Europe’s Dow Jones 600 climbed 0.9 percent after Obama called for an extension of tax incentives worth $38 billion over this year and next. Many of the steps he outlined repeated initiatives he’s proposed previously. Europe’s Dow Jones Stoxx 600 Index rose 1.4 percent.
“I liked the initiatives that were about re- industrializing the U.S. to produce jobs and growth,” said Geoff Howie, senior vice president at MF Global Singapore, part of the world’s largest broker of exchange-traded futures and options. “This could see money taken out of the foxhole and buying equities and selling Treasuries.”
Obama Speech
Obama said the government also must tackle the federal budget deficit, forecast to be $1.35 trillion this year.
The government will sell $32 billion in seven-year notes today, the last of three sales this week totaling $118 billion.
Today’s auction of seven-year debt follows a $42 billion sale of five-year securities yesterday and a $44 billion offering of two-year notes on Jan. 26.
The prior sale of seven-year notes on Dec. 30 drew a high yield of 3.345 percent and attracted bids for 2.72 times the amount on offer, compared with a bid-to-cover ratio of 2.76 at the Nov. 25 auction. The seven-year security to be sold today yielded 3.17 percent in pre-auction trading.
To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.netPaul Dobson in London at pdobson2@bloomberg.net
