Treasury Bonds Drop on Stronger Economic Data, Expectations for Inflation
Treasuries due in five years and longer fell after data showing retail sales rose more than forecast and New York area manufacturing climbed added to speculation Federal Reserve efforts to spur the economy will reignite inflation.
The yield on the 30-year bond touched a two-month high as traders bet the Fed will purchase shorter-term U.S. notes in a strategy called quantitative easing. Fed Chairman Ben S. Bernanke said in a speech that additional stimulus may be warranted because inflation is too low and unemployment too high, fueling concern policy makers will take unconventional steps to generate a rise in the consumer price index.
“The market is buying into the Fed mantra that it will work to get us out of this low inflationary environment,” said Michael Pond, an interest-rate strategist in New York at Barclays Plc, one of 18 primary dealers that trade Treasuries with the Fed.
Benchmark 10-year note yields climbed six basis points, or 0.06 percentage point, to 2.56 percent at 4:55 p.m. in New York, according to data compiled by Bloomberg. It touched 2.59 percent, the highest this month. The 2.625 percent security due in August 2020 dropped 1/2, or $5 per $1,000 face amount, to 100 17/32. Yields increased 17 basis points for the week.
Thirty-year bond yields increased six basis points to 3.99 percent and reached 4.01 percent, the highest level since Aug. 10. They climbed 23 basis points for the week, the most since August 2009.
Focus on Inflation
“The Fed brought the inflation part into the conversation, and it’s where the focus is,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist at Morgan Stanley Smith Barney. “The inflation part is creating some anxiety. That’s not good news for the back end if you start tinkering with inflation numbers.”
The spread between yields on 30-year bonds and comparable Treasury Inflation Protected Securities, an indication of inflation expectations over the life of the securities, touched 2.61 percentage points, the widest since May 14. The five-year average is 2.4 percentage points. The gap between 10-year notes and comparable TIPS reached 2.17 percentage points, near the most in five months.
The extra yield that investors demand for 30-year bonds compared with 10-year debt touched a record high 1.46 percentage points today. The five-year average is 0.52 percentage point, according to Bloomberg data.
Longer-term Treasuries briefly pared losses as data showed the Thomson Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly decreased to 67.9 in October from 68.2 a month earlier.
‘Continues to Recover’
Government reports today showed U.S. retail sales increased more than forecast in September and New York area manufacturing surged this month.
“The economic news was a bit better than what the market was looking for,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “The economy continues to recover, although it’s still disappointing.”
Another report showed the cost of living in the U.S. rose less than forecast in September. The consumer-price index was up 0.1 percent after 0.3 percent gains in the prior two months, figures from the Labor Department showed today in Washington.
Bernanke and his central bank colleagues are considering ways they can stimulate the economy as the unemployment rate holds near 10 percent and inflation falls short of their goals.
“There would appear -- all else being equal -- to be a case for further action,” Bernanke said today in the text of remarks at a Boston Fed conference.
‘Costs and Limitations’
The central bank could expand asset purchases or change the language in its policy statement, Bernanke said, while adding that “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.”
“Bernanke makes no mentions of a ‘shock and awe’ approach, and indeed notes on multiple occasions that any new asset- purchase initiative should proceed with ‘caution,’” Michael Cloherty, head of U.S. rates strategy for fixed-income and currencies at primary dealer Royal Bank of Canada in New York, wrote in a note to clients. “The Fed seems inclined to take a ‘baby steps’ approach.”
The Fed previously acquired about $1.75 trillion of Treasury and mortgage-related debt to sustain the recovery, concluding the program in March.
Fed Meeting
Policy makers, who have kept the benchmark interest rate at a range of zero to 0.25 percent since December 2008, are scheduled to meet next Nov. 2-3.
Retail sales in the U.S. rose 0.6 percent last month, just below the 0.7 percent revised gain in August, Commerce Department data showed today in Washington. Economists had forecast a rise of 0.4 percent, according to a Bloomberg survey.
The Fed Bank of New York’s Empire State manufacturing index surged to 15.73 this month, from a revised 4.14 last month. Readings greater than zero signal expansion in the area covering New York, northern New Jersey and southern Connecticut.
The Fed bought $4.69 billion of Treasuries today as part of a program to reinvest principal payments on its mortgage holdings into long-term government debt to prevent money from being drained out of the financial system.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., cut holdings of government- related debt and bought more mortgages in September.
The $252 billion Total Return Fund’s investment in government-related debt was cut to 33 percent of assets, from 36 percent the previous month, according to the website of Newport Beach, California-based Pimco.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net;
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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