Treasuries Snap Three-Day Advance Before Retail-Sales Report

Treasury 10-year notes snapped three days of gains before a report tomorrow that forecasters said will show U.S. retail sales increased for a fourth month in July, adding to signs the economy is improving.

The 10-year break-even rate, a gauge of market inflation expectations measured by the yield gap between inflation-indexed and nominal Treasury 10-year notes, was at almost a 10-week high before separate reports analysts said will show consumer prices rose last month. Longer-maturity Treasuries, those most sensitive to inflation, are the world’s worst-performing bonds over the past year.

“The data has borne out the fact that the economy is doing better,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia (BNS), one of 21 primary dealers that trade with the Federal Reserve. “I just don’t think people are willing to risk here” by purchasing Treasuries.

Benchmark 10-year yields increased four basis points to 2.62 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due in August 2023 fell 11/32, or $3.44 cents per $1,000 face amount, to 98 30/32.

U.S. notes and bonds due in a decade or longer fell more than 10 percent in the past 12 months, the biggest loss of 144 debt indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies.

The central bank acquired $1.496 billion of Treasuries today maturing from February 2036 to May 2043. The purchases are the part of the Fed’s quantitative-easing program aimed at keeping long-term rates low.

Sales Increase

The Fed is buying $85 billion of Treasuries and mortgage debt each month to put downward pressure on interest rates. Policy makers are discussing whether the economy has improved enough for them to start reducing the purchases.

Retail sales climbed 0.3 percent last month after a 0.4 percent advance in June, according to the median forecast of 64 economists surveyed by Bloomberg before the Commerce Department releases the figures.

The sales data is “the most important event of the week” and may influence whether policy makers slow the pace of bond purchases, said John Briggs, a U.S. government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, a primary dealer. “The burden of proof is on the data to take them off of tapering.”

QE Impact

The Fed’s unprecedented expansion of its balance sheet to a record $3.6 trillion from $900 billion in August 2008 has probably given a more limited boost to the U.S. economy than previously estimated, two regional Fed economists said.

“Asset-purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation,” Vasco Curdia, an economist at the San Francisco Fed, and Andrea Ferrero, an economist at the New York Fed, said in a research note released today. “Communication about the beginning of federal funds rate increases will have stronger effects than guidance about the end of asset purchases.”

Chairman Ben S. Bernanke said June 19 that the Fed may begin reducing asset purchases later this year and end them around mid-2014 if the economy improves in line with officials’ expectations. The central bank will keep “a high degree of monetary accommodation” in place for “an extended period” by keeping interest rates near zero after the purchases end, Bernanke said in congressional testimony last month.

Inflation Target

Producer prices rose 2.4 percent in July from the year before, versus 2.5 percent in June, according to a Bloomberg News survey of economists before the Labor Department reports the number on Aug. 14. Consumer prices advanced 2 percent, quickening from 1.8 percent, according to the surveys. The department is scheduled to report the figure on Aug. 15.

The Fed’s inflation target is 2 percent. The personal consumption expenditure deflator, the central bank’s preferred gauge, rose to 1.3 percent in June from a year earlier.

“We are very close to equilibrium point in the market, given where the continued Fed purchases, the slightly weaker stock market and the economic data,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “In the long run, higher yields are still in the cards as the taper is still coming.”

The economy added 162,000 jobs in July, compared with the median forecast of 185,000 in a Bloomberg News survey, while the unemployment rate fell to 7.4 percent. The economy has added an average 192,000 jobs a month through July, the fastest pace since 2005 when it created 207,000 positions per month, Labor Department data show.

Break-Evens

The difference between yields on U.S. 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.26 percentage points today, after touching 2.28 on Aug. 9, the most since May 29.

The five-year, five-year forward break-even rate, the Fed’s measure of traders’ forecasts for prices in the economy from 2018 to 2023, was 2.73 percent as of Aug. 6, the most since May 28. It gained from this year’s low of 2.33 percent in June. The average over the past decade is 2.75 percent.

The Federal budget deficit for July was $97.6 billion, bringing the total for fiscal 2013, which ends Sept. 30, to $607.4 billion, or the lowest to date since 2008, the Treasury said today.

The Treasury Department said July 31 it expects to gradually decrease coupon-auction sizes during the coming quarter as the nation’s fiscal health improves.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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