Treasuries Fall Before Inflation Reports; Pimco’s Gross Sells

Treasuries fell as economists said U.S. reports this week will show inflation is quickening and after Pacific Investment Management Co. reported that Bill Gross set a bet against government debt.

Longer maturities led the decline as the U.S. prepared to sell $32 billion of 3-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds in three daily auctions starting tomorrow. Pimco’s record-size $236 billion Total Return Fund had minus 3 percent of its assets in government and related debt, the Newport Beach, California-based company said on its website, after reducing the position to zero in February.

“There is a fear of inflation in the U.S.,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s third- largest publicly traded bank by assets. “This week’s reports will be bad news for Treasuries.”

Ten-year rates increased two basis points to 3.59 percent as of 6:46 a.m. in London, according to Bloomberg Bond Trader prices. The 3.625 percent note maturing in February 2021 declined 1/8, or $1.25 per $1,000 face amount, to 100 7/32.

The Labor Department on April 15 will say consumer prices rose 0.5 percent last month from February, and gained 2.6 percent from March 2010, according to a Bloomberg News survey. Core prices, which exclude volatile food and fuel, increased 0.2 percent for a third month, another survey showed.

Wholesale Prices

Labor Department figures earlier in the week will show wholesale prices and the cost of goods imported into the U.S. also climbed. So-called producer prices rose 1 percent in March, while import prices gained 2.2 percent, the surveys show.

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 debt, widened to 2.66 percentage points today, the most in three years.

Five-year inflation swaps rose to 2.70 percent on April 8, also the most since 2008. The securities allow investors to exchange fixed-interest rates for returns equivalent to the consumer price index.

Treasuries handed investors a 2.8 percent loss in the six months ended March 31, according to Bank of America Merrill Lynch’s Treasury Master index. The MSCI All Country World Index of stocks returned 14 percent in the period.

Yields are still below levels seen in the past decade. Ten- year rates climbed as high as 5.53 percent in May 2001. The figure has averaged 4.12 percent over the last 10 years.

Lawmaker Resolve

Investors say they are seeing lawmaker resolve this year to trim the $1 trillion deficit.

“The market doesn’t care where you cut, as long as you are cutting, and we are starting to see that,” said Tad Rivelle, head of fixed-income investment at Los Angeles-based TCW Group Inc., which oversees about $115 billion. “The budget-cutting environment is bond friendly.”

Optimism that Congress will rein in spending has driven yields on 10-year U.S. notes to the lowest level relative to German bunds since September. Traders are paying the least to insure Treasuries against losses with credit-default swaps than at any time since August, according to CMA prices.

Budget cuts would mean the U.S. wouldn’t sell as much debt, which has grown to $9.13 trillion in marketable Treasuries from $4.34 billion in mid-2007 as the government boosted spending to pull the economy out of recession.

Pimco’s Holdings

Pimco’s Gross increased cash and equivalents to 31 percent from 23 percent, making it the largest component for the first time in four years.

Gross has said he’s concerned about what will happen when the Federal Reserve stops buying Treasuries, after the securities fell for a second quarter. The central bank implemented a program in November to purchase $600 billion of debt by June 30 to sustain the economic expansion.

The Fed plans to scoop up $6.5 billion to $8.5 billion of debt due from October 2016 to March 2018 today.

“Their objective obviously is to improve the economy and to create jobs, but also to put a floor under the stock market, and we know that’s working,” Gross said April 1 in a radio interview on “Bloomberg Surveillance” hosted by Tom Keene. “The question remains, when the Fed stops buying Treasuries, does the private sector take the baton and run the last leg of the relay race?”

The Total Return Fund can have a so-called negative position by using derivatives, futures or by shorting.

Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.

Pimco’s government-related holdings consist of sovereign bonds, Treasury Inflation Protected Securities, agency debt, interest rate swaps, Treasury futures and options and corporate securities guaranteed by the Federal Deposit Insurance Corp., according to the company.

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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