Treasuries Fail to Recoup Loss as Commodities Signal Inflation

Treasuries failed to climb back from a loss yesterday as commodities rose to a 26-month high, feeding speculation the Federal Reserve will be successful in its efforts to spur inflation.

Demand for the relative safety of U.S. government securities ebbed after Chinese Vice Premier Wang Qishan said his nation had taken “concrete action” to help the European Union with its debt problems. Fed Bank of St. Louis President James Bullard said on CNBC yesterday he is concerned about the influence of central bank actions on commodity prices.

“The Fed is trying to create inflation and inflation expectations,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “Commodity prices seem to be picking up. Those factors will prevent an aggressive rally.”

The benchmark 10-year note yielded 3.35 percent as of 6:49 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 traded at 93 31/32. Yields increased one basis point yesterday.

The Thomson Reuters/Jefferies CRB Index of 19 commodities climbed to 324.37 yesterday, the most since Oct. 6, 2008. Gold and oil both rose for a third day today.

Treasuries have handed investors a 2.1 percent loss this month, the most in a year, according to Bank of America Merrill Lynch indexes. BNP, one of the 18 primary dealers that trade directly with the Fed, last week increased its forecast for 10- year yields by March 31 to 3.25 percent from 2.4 percent.

‘Very Concerned’

Bullard said he’s “very concerned about feedbacks to commodity prices” from the Fed’s policy of bond buying that has been dubbed QE2 for a second round of quantitative easing. The policy has been “modestly successful so far,” he said.

The central bank is scheduled today to purchase $7 billion to $9 billion of notes due from June 2016 to November 2017 and $1 billion to $2 billion of Treasury Inflation Protected Securities maturing from July 2012 to February 2040.

The Fed scooped up $14.6 billion of debt yesterday, the most in a single day under this round of easing.

The euro gained for the first time in three days after China’s Wang said the nation is helping European Union with its debt problems.

China supports the International Monetary Fund’s measures and “has taken concrete action to help some EU members counter the sovereign-debt crisis,” Wang said at the start of the Third EU-China High-Level Economic & Trade Dialogue in Beijing.

The currency climbed 0.3 percent to $1.3173.

Spain’s Rating

Moody’s Investors Service said on Dec. 15 it may lower Spain’s credit rating, citing “substantial funding requirements.” The company cut Ireland’s rank by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece.

China probably won’t make any big changes to the way it allocates its currency reserves, said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $66.8 billion in assets.

Inflation hasn’t been a problem in the U.S. so far. Consumer prices excluding food and energy costs increased 0.8 percent in November from the same month last year, the Labor Department said Dec. 15. The figure was 0.6 in October, the smallest gain in data going back to 1958.

Ten-year Treasuries offer a real yield, after accounting for costs in the economy, of 2.25 percent. The figure was 2.39 percent on Dec. 15, the most in a year.

Inflation Bets

Interest rates indicate traders are adding to bets that inflation will pick up. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, widened to 2.28 percentage points from this year’s low of 1.47 percentage points in August. It is more than the five-year average of 2.09 percentage points.

Wal-Mart Stores Inc. the world’s biggest retailer, raised prices on hundreds of toys before Christmas.

U.S. 10-year yields will increase to 4 percent by the end of 2011 as the government borrows to sustain the expansion, Bank of America Merrill Lynch economists led by Ethan Harris in New York, wrote in a report Dec. 17.

“Buy stocks, sell bonds,” the economists wrote. “While most of the developed world is starting to rein in budget deficits, the U.S. deficit continues to grow.” President Barack Obama has increased the U.S. marketable debt to a record $8.75 trillion.

Yields may reach 4 percent soon, said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s largest interdealer broker.

“I don’t think it will be too long,” Carr wrote in a note to clients today. “We have unparalleled monetary stimulus at work on the globe and realistically, that’s not going to change much in 2011.”

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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