Treasuries were little changed amid speculation Federal Reserve Chairman Ben S. Bernanke will seek to manage investor expectations for stimulus reduction when he testifies in Congress today.
Benchmark 10-year yields were about three basis points from the lowest in a week before reports today that economists said will show gains in housing starts and building permits. Bernanke, who will appear before U.S. House members in Washington today and senators tomorrow, has said the Federal Open Market Committee may start reducing its $85 billion in monthly bond purchases later this year, assuming economic growth meets the Fed’s predictions.
“The difference today is that Bernanke has to express the view of the FOMC as a whole as opposed his to personal views expressed last week,” said Marc Ostwald, a rates strategist at Monument Securities Ltd. in London. “The divergence of opinions on the FOMC is quite large. We’re trying to find out what the new range is for Treasuries. The range has to be wider given there is so much uncertainty” over Fed policy, he said.
The 10-year yield increased one basis point, or 0.01 percentage point, to 2.55 percent at 6:53 a.m. New York time, Bloomberg Bond Trader data showed. The rate dropped to 2.51 percent yesterday, the least since July 5. The 1.75 percent note maturing in May 2023 slid 3/32, or 94 cents per $1,000 face amount, to 93 1/8.
Treasury yields have fallen from near the highest in two years after Bernanke said last week that “highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy.” Kansas City Fed President Esther George said yesterday she expects stronger growth as early as 2014.
The Fed chief’s prepared testimony will be released at 8:30 a.m. in Washington and the hearing will begin at 10 a.m.
“Bernanke is trying to get a message over to markets about what the tapering in Treasuries and mortgage-backed securities might mean,” said Tony Morriss, the head of interest-rate research at Australia & New Zealand Banking Group Ltd. (ANZ) in Sydney. “It’s simply reducing the amount of Treasuries and MBS the Fed buys, it’s not like they’re ending it right away.”
Commerce Department data today will show housing starts rose to a 960,000 annualized rate last month from a 914,000 pace in May, according to the median estimate of economists surveyed by Bloomberg News. That would be the most since March. Building permits (NHSPATOT) climbed to a 1 million annualized pace in June from a revised 985,000 rate in the previous month, a separate survey shows.
The cost of living in the U.S., as measured by the consumer price index, rose in June by the most in four months, according to a Labor Department report yesterday. The annualized rate increased to 1.8 percent, indicating inflation is advancing toward the Fed’s 2 percent goal.
“We are certainly expecting that the data is going to remain solid,” said Adam Donaldson, head of debt research at Sydney-based Commonwealth Bank of Australia (CBA), the nation’s largest lender. “Recovery is self-sustaining, and we will be seeing a consistent strengthening spreading from the housing sector through the rest of the economy.”
The rate on benchmark U.S. government debt will climb to 2.62 percent by the end of 2013, according to the weighted average forecast in a Bloomberg poll of economists. CBA’s Donaldson sees the 10-year yield at 3 percent by Dec. 31.
“If unemployment falls as expected and inflation moves toward the 2 percent goal, then reducing the pace of purchases in September and ending them next year is appropriate,” Kansas City Fed President George said yesterday.
Bank of England Governor Mark Carney and European Central Bank President Mario Draghi have signaled in separate statements this month that the benchmark rates of the two central banks will remain at record lows. The Treasury 10-year yield was 102 basis points more than the rate for equivalent German bunds on July 12, the biggest gap since 2006.
The U.S. economy will expand 1.8 percent this year, according to the median estimate of economists surveyed by Bloomberg. The U.K. may grow 0.95 percent, while the euro-area economy will shrink 0.6 percent, separate surveys showed.
“This was an unprecedented program and the fact that they’ve been able to announce the end to it or the impending end to it without a major dislocation has to be very pleasing for them,” Deutsche Bank AG co-Chief Executive Officer Anshu Jain said in a Bloomberg Television interview, referring to the Fed’s monetary policy. “I daresay without any special knowledge that the Fed would be delighted with the market reaction.”
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was at 88 yesterday, the lowest level since June 19. The figure is down from 117.89 on July 5, the highest since December 2010. The one-year average is 64.5.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 35 percent to $256.2 billion yesterday from $189.2 billion on July 15. The 2013 average is $320 billion.