BLBG: Treasuries Fall as Fed Lifts Discount Rate, Debates Asset Sales
By Susanne Walker
Feb. 20 (Bloomberg) -- Treasuries fell, pushing yields to the highest levels in at least five weeks, amid concern the Federal Reserve’s increase in the discount rate signaled policy makers are moving closer to lifting benchmark borrowing costs.
The difference in yield between 2- and 10-year notes, known as the yield curve, touched a record high before the Fed raised the rate for direct loans to banks for the first time in more than three years. Several policy makers said the move doesn’t portend changes in the outlook for monetary policy. The U.S. will auction $126 billion in notes and bonds next week.
“The fact is that we are past the banking crisis,” said Thomas Tucci, head of U.S. government bond trading in New York at the Royal Bank of Canada, one of the 18 primary dealers required to bid at Treasury auctions. “Now it’s really about where people feel things are going where the Fed is concerned.”
The 10-year note yield rose for a second week, increasing eight basis points, or 0.08 percentage point, to 3.77 percent in New York, according to BGCantor Market Data. It touched 3.82 percent yesterday, the highest level since Jan. 11. The 3.625 percent security due in February 2020 declined 21/32, or $6.56 per $1,000 face amount, to 98 3/4.
The two-year note yield also gained for a second week, rising nine basis point to 0.92 percent. It touched 0.96 percent yesterday, the highest since Jan. 14.
The yield curve was at 2.86 percentage points yesterday after steepening to a record 2.94 percentage points on Feb. 18.
Inflation Below Forecast
Consumer prices increased 0.2 percent last month, a Labor Department report yesterday showed, falling short of a 0.3 percent gain forecast in a Bloomberg survey.
The Fed said Feb. 18 it was increasing the discount rate to 0.75 percent from 0.50 percent to encourage financial institutions to rely less on the central bank for short-term borrowing.
Fed Chairman Ben S. Bernanke will probably assure Congress next week that a rise in the benchmark interest rate isn’t imminent. Bernanke is scheduled to deliver his semi-annual report on the economy and interest rates to House and Senate panels Feb. 24-25.
The discount rate increase is not a signal the Fed is prepared to tighten credit, New York Fed President William Dudley, a voting member of the rate-setting Federal Open Market Committee, said yesterday.
Growth, Jobs Focus
“We got an inflation report that showed there’s no inflation pressure,” Dudley said after a speech in San Juan, Puerto Rico. “So our focus needs to be on growth and jobs.”
Atlanta Fed President Dennis Lockhart and Fed Governor Elizabeth Duke also said in speeches this week the move doesn’t signal a tightening of policy, and St. Louis Fed President James Bullard said the central bank may not lift its benchmark rate until 2011.
The discount rate boost is a step in the Fed’s retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. The central bank has provided hundreds of billions of dollars in backstop credit to banks, bond dealers, commercial paper borrowers and troubled financial institutions such as American International Group Inc.
“The hike in the discount rate tells us absolutely nothing about the broader timing for a hike in the fed funds rate,” Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York, wrote in a note to clients.
Futures contracts on the Chicago Board of Trade showed a 70 percent probability yesterday that the Fed will lift the federal funds rate, the target for overnight loans between banks, to at least 0.5 percent by November. The odds were 65 percent a day earlier. The rate has been in a range of zero to 0.25 percent since December 2008.
‘Extraordinary Steps’
Minutes released Feb. 17 of the Fed’s January policy meeting showed some policy makers pushed to start selling assets in the “near future.” Officials unanimously agreed the central bank’s $2.26 trillion balance sheet will need to shrink “substantially over time” and return its holdings to just Treasuries.
“The Fed took extraordinary steps to get accommodation, and it’s going to take extraordinary steps to reverse it,” said Ward McCarthy, chief financial economist at primary dealer Jefferies & Co. Inc. in New York. “It’s a wake-up call that the exit strategy and the tightening of monetary policy that will come, still several months down the road, is not going to be a standard tightening.”
The U.S. will sell $126 billion in notes and bonds on successive days beginning Feb. 22. It will auction $8 billion in 30-year TIPS, $44 billion in 2-year debt, $42 billion in 5-year notes and $32 billion in 7-year securities. The $118 billion in nominal debt offerings matches a record.
The TIPS sale next week will be the first of inflation- linked 30-year securities since 2001, when the Treasury stopped selling all so-called long bonds. The U.S. introduced a 20-year inflation-indexed bond in 2004, which it stopped selling last year to make room on the auction calendar for the 30-year TIPS.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net
