BLBG: U.S. 10-Year Yields Near 5-Week High on Discount-Rate Increase
By Theresa Barraclough and Keith Jenkins
Feb. 19 (Bloomberg) -- U.S. Treasury 10-year note yields were near the highest in five weeks after the Federal Reserve unexpectedly raised its discount rate yesterday for the first time in three years.
The Fed lifted the rate charged to banks for direct loans from 0.5 percent to 0.75 percent, spurring concern the central bank plans more moves to tighten monetary policy and unwind emergency stimulus. The difference in yield between two- and 10- year notes narrowed from a record spread as traders speculated an interest-rate increase this year can’t be ruled out.
The Fed’s move, while “technically” not tightening, “represents another pace away from the super-easy monetary policy, and that will never be taken positively by fixed-income markets,” said Jason Simpson, an interest-rate strategist at Royal Bank of Scotland Group Plc in London.
The yield on the benchmark 10-year note was unchanged at 3.80 percent as of 9:54 a.m. in London, according to BGCantor Market Data, as bonds pared an earlier gain. The yield earlier reached 3.82 percent, matching the highest since Jan. 12. The 3.625 percent security due February 2020 rose 1/32, or 31 cents per $1,000 face amount, to 98 18/32.
The spread between two- and 10-year yields narrowed to 2.86 percentage points and tightened to as little as 2.82 percentage points, the smallest margin in a week, according to data compiled by Bloomberg. The gap widened to a record 2.94 percentage points yesterday.
‘Normalization’
The central bank said yesterday the increase in its discount rate was “intended as a further normalization of the Federal Reserve’s lending facilities.” It also said “the modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.”
Treasuries are headed for a second weekly decline on concern supply will overwhelm demand as China seeks to diversify its reserves, currently the world’s largest, away from U.S. government debt.
The U.S. yesterday said it will sell $126 billion in notes and bonds next week, consisting of $8 billion in 30-year Treasury Inflation Protected Securities, $44 billion in two-year debt, $42 billion in five-year notes and $32 billion in seven- year securities. The auctions will be on successive days starting Feb. 22.
China’s Treasury holdings peaked at $801.5 billion in May, and net sales in November and December were the first consecutive months of reductions since 2007. China’s ownership of U.S. debt fell 4.3 percent, the most since 2000, to $755.4 billion in December, Treasury Department figures showed Feb. 16. The 10-year yield has advanced nine basis points since Feb. 12.
Consumer Prices
“On the rates side we saw U.S. Treasuries sell off,” wrote Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. News of debt sales “probably aided the price action, especially after recent news of Chinese Treasury sales.”
A report today from the Labor Department is expected to show consumer prices increased 0.3 percent in January after rising 0.2 percent the previous month, according to a Bloomberg survey of economists. Producer prices accelerated more than anticipated in January, a report showed yesterday.
The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices, was 2.32 percentage points today, compared with 2.25 points a week ago.
Federal Reserve Bank of St. Louis President James Bullard, speaking in Memphis yesterday, called speculation that the central bank will raise the federal funds rate this year “overblown.”
Ten-year yields are likely to decline to 3.58 percent by the end of March, according to an estimate in a Bloomberg survey with a heavier weighting on more recent forecasts.
To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net or Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.
