BLBG: Treasuries Little Changed as Fed to Keep Rates at Record Low
By Cordell Eddings and Anchalee Worrachate
Dec. 16 (Bloomberg) -- Treasuries were little changed amid speculation the Federal Reserve will indicate it plans to keep interest rates at a record low after its two-day meeting ends today.
Two-year note yields were within five basis points of their highest level in over a month as reports showed consumer prices and housing starts increased in November. The Federal Open Market Committee’s policy makers may indicate the U.S. recovery is gaining strength while repeating a pledge to keep the benchmark interest rate near zero for an “extended period.”
“The market doesn’t expect any surprises from the FOMC,” said William O’Donnell, U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 18 primary dealers that trade with the central bank. “Even with slightly better economic news coming out of late, Bernanke pretty well mapped out the Fed’s outlook last week.”
The 10-year note yield traded at 3.58 percent at 8:33 a.m. in New York, according to BGCantor Market Data. The 3.375 percent security due in November 2019 was at 98 1/4.
Two-year notes yielded 0.85 percent after yesterday touching 0.90 percent, the highest level since Nov. 5.
The Fed will hold its target for overnight lending between banks in a range of zero to 0.25 percent, all 98 economists surveyed by Bloomberg News predict.
“The FOMC meeting now under way is highly unlikely to result in any significant policy change, though the tone of commentary on economic conditions will probably sound more upbeat,” Ed McKelvey, senior U.S. economist at primary dealer Goldman Sachs Group Inc. in New York, wrote in a note to clients. Goldman is one of the 18 primary dealers that trade directly with the central bank.
Withdraw Programs
The 0.4 percent increase in the consumer-price index followed a 0.3 percent gain in October, figures from the Labor Department showed in Washington. Excluding food and energy costs, the so-called core index was unexpectedly unchanged.
Housing starts rose 8.9 percent to an annual rate of 574,000, according to the Commerce Department. Building permits, a sign of future construction, climbed to the highest level in a year.
The FOMC will probably discuss how to withdraw unprecedented programs to revive credit, including purchases of $1.43 trillion in housing debt, economists said.
“I continue to expect slack resources, together with the stability of inflation expectations, to contribute to the maintenance of low inflation,” Bernanke said yesterday in a written response to questions from Senator Jim Bunning, a Kentucky Republican.
Spread Widens
Yields indicate traders are adding to bets inflation will quicken in the years ahead.
The spread between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, widened to 2.29 percentage points yesterday, within one basis point of this year’s high.
The 10-year yield touched 3.62 percent yesterday, the most since Aug. 13, from the record low of 2.04 percent set Dec. 18, 2008.
“We’re getting more and more questions from clients on inflation,” said Marc Fovinci, head of fixed income at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which has $2.8 billion in assets. “The economy is starting to recover. Yields are going to go up next year.”
Ten-year rates will advance to 3.70 percent by the middle of 2010, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.
Ferguson Wellman is favoring corporate bonds, Fovinci said. It is also sticking to shorter-maturity securities, which will fall less than longer-term debt if interest rates rise, he said.
Annual Loss
Treasuries have declined 2.8 percent this year, while corporate bonds returned 26 percent, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. Investors sought higher-yielding assets as the U.S. economy grew.
U.S. government securities fell yesterday as the U.S. producer price index increased last month more than forecast. A separate report showed industrial production also increased.
“The economic numbers have been better than expected and with PPI showing more-than-expected inflation, we are starting to see a backdrop that makes the market nervous,” said Larry Milstein, managing director in New York of government and agency debt trading at RW Pressprich & Co., a fixed-income broker and dealer for institutional investors.
The 1.8 percent increase in prices paid to factories, farmers and other producers was more than twice as large as anticipated and followed a 0.3 percent gain in October, according to Labor Department data.
The Fed will hold its target rate steady through the first six months of 2010, Bloomberg surveys of economists show.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.netWes Goodman in Singapore at wgoodman@bloomberg.net.
