U.S. 10-Year Notes Head for Biggest Weekly Decline Since April on Outlook
Treasury 10-year notes were poised for the biggest weekly decline since April as concern eased that the U.S. is slipping back into recession and the government prepared to sell $69 billion of notes and bonds.
The benchmark 10-year yield touched the highest level in almost two weeks after rising yesterday above 3 percent for the first time this month as stocks rallied on evidence of a global economic recovery. The U.S. is set to auction $35 billion of three-year notes on July 12, $21 billion of 10-year debt the following day and $13 billion of 30-year bonds on July 14.
“Some of the data this week, with the better performance of the equity market and some of the fear being relinquished on the economy side, is all it is,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia. “People are lightening up positions on the long end.”
The 10-year note yield increased 1 basis point, or 0.01 percentage point, to 3.04 percent at 11:35 a.m. in New York, according to BGCantor Market Data. The yield touched 3.06 percent, the highest level since June 28. The price of the 3.5 percent security due in May 2020 fell 3/32, or $94 cents per $1,000 face amount, to 103 7/8.
The yield has climbed 6 basis points this week, the most since the five days ended April 2. It dropped to 2.8793 percent on July 1, the lowest level since April 2009. The two-year yield increased 1 basis point to 0.63 percent today and was little changed for the week.
‘Knife’s Edge’
“We’re on knife’s edge,” said Christian Cooper, senior rates trader in New York at Jefferies & Co., one of the 18 primary dealers that trade with the Federal Reserve. “There’s a little bit of optimism, but we could go back to a concern about a double-dip if we have consistent misses on earnings or a surprise out of Europe. Supply is starting to impact the price dynamic.”
Treasuries slipped as Commerce Department data showed inventories at U.S. wholesalers rose in May for a fifth month, increasing 0.5 percent as companies ensured they had enough goods on hand to keep pace with demand. The Labor Department said yesterday initial claims for jobless benefits in the U.S. fell more than expected to 454,000 in the week ended July 3.
The Standard & Poor’s 500 Index was poised for a 4.8 percent rally this week.
10-Year Yields
Investors should sell 10-year Treasuries, as yields “will climb back towards 3.25 percent,” strategists at Citigroup Inc. led by Amitabh Arora in New York wrote in a note to clients today. The firm recommends buying five-year notes.
Ten-year yields will increase to 3.37 percent by year-end, according to the average forecast in a Bloomberg News survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.
“While the longer end has traded weaker the last two days on equity strength, there has been no reversal yet of the new consensus for the Fed on hold into 2011,” Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients.
Traders reduced bets the Federal Reserve will raise borrowing costs by their December meeting, according to futures on the Chicago Board of Trade. Expectations fell to a 14 percent chance, from 29 percent a month ago.
The International Monetary Fund on July 7 raised its forecast for worldwide growth this year to 4.6 percent, the most since 2007, versus an April projection of 4.2 percent.
Double-Dip Unlikely
The world isn’t likely to experience a double-dip recession, Kenneth Rogoff, a Harvard University professor and former chief economist of the IMF, said in Singapore today. The Fed may keep rates steady for a “very long time,” he told reporters after a conference.
Traders added the most to inflation bets in six weeks yesterday. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, widened by 8 basis points to 1.81 percentage points in the biggest increase since May 27. The gap on July 7 touched 1.68 percentage points, a nine-month low. It increased to 1.84 percentage points today.
The Fed cited slowing inflation in its June 23 statement while reaffirming it foresees a “moderate” pace of growth.
Treasuries returned 5.9 percent in the first six months of 2010, the most since 1995, according to Bank of America Merrill Lynch indexes. Investors snapped up government debt on speculation efforts by European governments to cut spending would slow global economic growth.
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
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