U.S. Yield Forecasts Rise to Eight-Month High on Fed Outlook

Economists boosted forecasts for U.S. 10-year yields to the most in eight months on speculation the Federal Reserve will reduce its bond purchases this year.

Yields will be at 2.42 percent by Dec. 31, according to Bloomberg surveys of banks and securities companies, with the most recent predictions given the heaviest weightings. The estimate has climbed from this year’s low of 2.14 percent in January as growth in the economy gives the Fed room to scale back quantitative easing. The U.S. is to announce today the size of three-, 10- and 30-year auctions scheduled for three days starting July 9. Treasuries fell seven of the last nine weeks.

“We are still waiting” to buy, said Kim Youngsung, the head of fixed income in Seoul at Samsung Asset Management Co., South Korea’s largest private bond investor with the equivalent of $99.3 billion in assets. “I haven’t seen this kind of a decline in the last couple of years. Quantitative easing will be stopped next year.”

Benchmark 10-year yields were little changed at 2.46 percent as of 8:04 a.m. London time, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due in May 2023 was 93 25/32. While forecasts are rising, the projection is less than the current yield, suggesting a two-month rout is ending.

The U.S. will probably sell $32 billion of 3-year debt, $21 billion of 10-year notes and $13 billion of 30-year securities, according to Stone & McCarthy Research Associates, an economic advisory company in Princeton, New Jersey. The U.S. issues this combination of securities every month.

Treasury Losses

U.S. government securities lost 2.7 percent in the past three months, the Bloomberg U.S. Treasury Bond Index (BUSY) shows.

Bill Gross’s Pimco Total Return Fund (PTTRX), the world’s largest mutual fund, absorbed a record $9.9 billion in net redemptions last month. Pacific Investment Management Co., the Newport Beach, California-based firm that runs the fund, provided the preliminary estimate to Morningstar Inc. (MORN), the Chicago-based research firm said yesterday in an e-mailed statement. The withdrawals left the fund with $268 billion in assets at the end of June, Morningstar said.

Volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased 11 percent yesterday to $277.3 billion, after falling to $250.9 billion the day before, which was the least since May 7.

Trading in Treasuries is scheduled to close at 2 p.m. New York time and stay shut tomorrow for a public holiday, according to the Securities Industry and Financial Markets Association website.

Fed Stimulus

The Fed is buying $85 billion of Treasuries and mortgage-backed securities each month to support the economy by putting downward pressure on borrowing costs.

Chairman Ben S. Bernanke said on June 19 that policy makers may begin slowing purchases this year if the economy achieves the sustainable growth the central bank has sought since the last recession ended in 2009.

Employers added 165,000 workers last month, after hiring 175,000 in May, according to a Bloomberg News survey of economists before the Labor Department data on July 5.

Data today will show companies in the U.S. boosted employment and service industries expanded in June, according to separate Bloomberg surveys. The Labor Department’s weekly report on initial claims for jobless insurance will say applications were little changed at 345,000, economists project.

Hideo Shimomura, who helps oversee the equivalent of $59.6 billion in Tokyo at Mitsubishi UFJ Asset Management Co., dropped his earlier view for Treasury yields to fall.

“I’ve turned bearish for the coming year,” said Shimomura, the chief fund investor at the unit of Japan’s largest publicly traded bank. “There’s a chance that the Fed will start to hike rates as early as the latter half of 2014. After they finish QE, theoretically they can raise rates.”

Ten-year yields may rise to 3 1/3 percent in the next 12 months, Shimomura said.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.

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