BLBG: Two-Year Treasuries Little Changed as Bernanke Sees ‘Headwinds’
By Anna Rascouet and Wes Goodman
Nov. 17 (Bloomberg) -- Two-year U.S. Treasuries were little changed as Federal Reserve Chairman Ben S. Bernanke indicated that the central bank’s extended period of low borrowing costs may get even longer.
The yield on the security, which is more sensitive to interest-rate expectations, fell to its lowest level since January yesterday after Bernanke said economic “headwinds” will restrain the pace of recovery. The yield on the 10-year note rose today before a Fed report economists say will show U.S. industrial production rose for a fourth month in October.
“Bernanke’s speech was positive for bonds,” said Michiel de Bruin, head of European fixed income in Amsterdam at F&C Asset Management Plc, which has $145 billion in assets. “But we’re positive on the economy. Yields don’t have much more room to fall.”
The two-year yield climbed 2 basis points to 0.79 percent as of 6 a.m. in New York, according to BGCantor Market Data, after reaching 0.76 percent yesterday, its lowest level since Jan. 23. The 1 percent security due October 2011 fell 1/32, or 31 cents per $1,000 face amount, to 100 13/32. The 10-year note yield rose 3 basis points to 3.36 percent.
Futures on the Chicago Board of Trade show just a 13 percent likelihood that the central bank will increase the target rate from the current range of between zero and 0.25 percent by March.
Bernanke, who is trying to cap consumer borrowing costs as part of his efforts to spur growth, also said, “the flow of credit remains constrained.”
Fed Success
Yields indicate the Fed has had some success in curbing loan costs. U.S. 30-year fixed mortgage rates have fallen to 4.98 percent from this year’s high of 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida.
Meanwhile, the variable interest rate on credit cards in the U.S. rose to 11.48 percent from this year’s low of 10.73 percent in March, Bankrate.com figures show.
Joblessness at a 26-year high is helping curb inflation, Labor Department figures may show this week.
A report today will show prices paid to producers rose 0.5 percent in October, reflecting higher food and fuel costs, according to the median forecast of economists surveyed by Bloomberg. Excluding energy and food, wholesale costs probably climbed 0.1 percent, the survey showed. From a year earlier, producer prices probably fell 1.8 percent.
The consumer price index, due tomorrow, increased 0.2 percent in October for a second month, the Bloomberg surveys show. Prices declined 0.3 percent from a year ago, according to the surveys.
U.S. Growth
The U.S. economy will grow at a 4 percent pace next year, said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. The company is one of the 18 primary dealers required to bid at the government debt auctions. A Bloomberg survey of banks and securities companies projects 2.6 percent growth, following a 2.4 percent contraction in 2009.
Ten-year yields will climb to 5 percent by late next year, and corporate bonds will rally, he said.
“The economy stabilized,” LaVorgna said yesterday in an interview in New York. “Consumer spending will start growing.”
The cost to hedge against losses on Treasuries using credit-default swaps climbed to the highest level in almost four months, indicating investors are becoming less confident in U.S. securities. Swaps on U.S. government debt in euros for five years increased to 31.13 basis points yesterday, the highest level since July 24. That means it costs 31,130 euros ($46,500) a year to protect 10 million euros of debt.
The credit-default swaps rose yesterday and on Nov. 13, climbing six basis points over the period. It was the biggest two-day increase since May.
Treasuries have handed investors a 2.5 percent loss this year as the economy showed signs of reviving, indexes compiled by Bank of America’s Merrill Lynch unit show. German bonds returned 1.7 percent, while Japan’s debt gained 0.3 percent, according to the indexes.
To contact the reporter on this story: Anna Rascouet in London arascouet@bloomberg.netWes Goodman in Singapore at wgoodman@bloomberg.net.
