BLBG: Treasury 10-Year Yields Near Lowest in Week Before FOMC Meeting
By Matthew Brown and Theresa Barraclough
March 15 (Bloomberg) -- U.S. 10-year Treasury yields were near the lowest in a week on speculation the Federal Reserve will signal interest rates will stay on hold for much of 2010 amid data that may show the recovery is yet to gain traction.
Two-year Treasury notes were little changed before tomorrow’s meeting of the Federal Open Market Committee, whose members may maintain their position that rates should stay low for an “extended period.” Separate reports today are forecast to show that industrial production growth stalled in February and manufacturing in the New York region slowed.
“The FOMC is the cloud hanging over the market and it’s going to be difficult for Treasuries to move much today,” said Sean Maloney, a fixed-income strategist at Nomura International Plc in London.
The 10-year note yield fell 1 basis point to 3.70 percent as of 6:41 a.m. in New York, according to BGCantor Market Data. The rate fell to a three-day low of 3.68 percent on March 12. The 3.625 percent security due February 2020 climbed 2/32, or 63 cents per $1,000 face amount, to 99 13/32.
Interest-rate futures on the CME Group Inc. exchange today showed an 84 percent chance U.S. policy makers will keep the target lending rate for overnight loans unchanged or lower through June, compared with 83 percent odds a month earlier.
All 88 economists surveyed by Bloomberg forecast the central bank will keep the target lending rate at a record low tomorrow. The Fed cut the benchmark to a range of zero to 0.25 percent in December 2008 and policy makers plan to end purchases of $1.25 trillion of mortgage-backed securities this month.
Industrial Output
Industrial output was unchanged in February, after growing 0.9 percent the prior month, a Bloomberg survey showed before the Fed reports the data today. Manufacturing in the New York region expanded at a slower pace this month, with the Fed Bank of New York’s index dropping to 22 from 24.91 in February, according to a separate Bloomberg survey.
Wholesale prices fell 0.2 percent in February after gaining 1.4 percent in January, according to another survey before a Labor Department report on March 17.
Confidence among U.S. consumers unexpectedly fell for a second month in March, to 72.5 from 73.6, the Reuters/University of Michigan preliminary consumer sentiment index showed last week.
U.S. retail sales unexpectedly climbed 0.3 percent, the fourth gain in the past five months, Commerce Department figures showed on March 12. Investors remained bearish on U.S. government debt last week, according to a survey of money managers by Ried Thunberg ICAP Inc.
‘Supporting Yields’
The company’s index measuring the outlook for Treasuries through the end of June was 45. A figure less than 50 shows investors expect prices to decline. The company, based in Jersey City, New Jersey, interviewed 25 fund managers controlling $1.38 trillion of assets.
Any gain in Treasuries may be tempered after Moody’s Investors Service said the U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose.
The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.
Priced in Concern
“We have priced in an element of Moody’s concern,” said Geoff Howie, senior vice president at MF Global Singapore, part of the world’s largest broker of exchange-traded futures and options. “Still, if there is a downgrade it will have a negative effect on the price of the bonds, thereby supporting yields. Traders, however, are more focused on government efforts to improve macro prudential systems.”
Fed Bank of New York President William Dudley said March 11 the U.S. should reduce projected government budget deficits even though the economy is weak and may relapse into recession.
“The economic recovery is still very fragile,” Dudley said in a speech in London. “This means that premature fiscal retrenchment could jeopardize the recovery and push a convalescent economy into a double-dip recession.”
The Congressional Budget Office projects President Barack Obama’s spending proposals would produce a record $1.5 trillion budget deficit this year and a $1.3 trillion deficit in 2011.
U.S. Treasuries returned investors 1.5 percent this year, compared with 2.1 percent for German government bonds and a 0.1 percent loss for U.K. gilts, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit.
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.
