BLBG: Treasuries Rise as Federal Reserve to Keep Rates at Record Low
By Cordell Eddings and Daniel Kruger
Dec. 16 (Bloomberg) -- Treasuries rose, with 10-year notes snapping five straight days of losses, as yields near four-month highs lured buyers amid speculation the Federal Reserve will indicate it plans to keep interest rates at virtually zero.
Ten-year note yields retreated from the highest levels since August as a report showed the so-called core index of consumer prices was unexpectedly unchanged in November. The Federal Open Market Committee’s policy makers may say after their two-day meeting ends today that 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 is starting to reach levels where we could start to see some reinvestment from the international community and a resumption of year-end buying due to these higher yields,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.
The 10-year note yield fell three basis points, or 0.03 percentage point, to 3.56 percent at 11:27 a.m. in New York, according to BGCantor Market Data. It touched 3.62 percent yesterday, the most since Aug. 13, from the record low of 2.04 percent set Dec. 18, 2008. The 3.375 percent security due in November 2019 rose 7/32, or $2.19 cents per $1,000 face amount, to 98 15/32.
“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.”
Consumer Prices
The consumer-price index rose 0.4 percent last month, following a a 0.3 percent gain in October, figures from the Labor Department showed. Excluding food and energy costs, the core index was unchanged, the first month without an increase since December 2008.
“It’s way too early for the Fed to be concerned about inflation,” said Todd White, who oversees government debt trading at RiverSource Investments in Minneapolis, which manages $93 billion of bonds. “The economic data came in as expected, so this little firming in the market is relief that we didn’t get more strong data.”
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 rate will stay steady through the first six months of 2010, Bloomberg surveys show.
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.
How to Withdraw
The FOMC will probably discuss how to withdraw its 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,” Fed Chairman Ben S. Bernanke said yesterday in a written response to questions from Senator Jim Bunning, a Kentucky Republican.
Yields indicate traders are adding to bets inflation will quicken in the years ahead.
The difference 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 spread was at 2.27 percentage points today.
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.
Stay Away
“We are telling people to stay away from the back end of the curve and play more conservatively on the front end if you are going to play in fixed income,” James Caron, head of U.S. interest-rate strategy at primary dealer Morgan Stanley in New York, said in an interview with Bloomberg Radio.
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 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.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net
