Treasury Yield Forecast for 2014 Climb to Survey High of 3.41%

Economist forecasts for Treasury yields at the end of 2014 are the highest since Bloomberg began surveying for the figure in July amid speculation the Federal Reserve will start cutting bond purchases as soon as next week.

Yields will increase to 3.41 percent, according to Bloomberg News surveys of banks and securities companies with the most recent predictions given the heaviest weightings. The Treasury plans to sell $30 billion of three-year notes today, $21 billion of 10-year debt tomorrow and $13 billion of 30-year bonds the next day. Dallas Fed President Richard Fisher said yesterday tapering needs to begin “as soon as possible” in an economy that doesn’t need any more stimulus.

“There’s grounds for optimism and quite a number of encouraging signs for the U.S. economy,” said Marc Ostwald, a rates strategist at Monument Securities Ltd. in London. “I would expect a retest of the recent yield highs this week by way of concession before the auctions.”

The U.S. 10-year yield fell two basis points, or 0.02 percentage point, to 2.83 percent at 9:58 a.m. in London, according to Bloomberg Bond Trader prices. The 2.75 percent note due in November 2023 rose 1/8, or $1.25 per $1,000 face amount, to 99 11/32. The yield climbed to 2.93 percent on Dec. 6, the highest since Sept. 13.

The Bloomberg U.S. Treasury Bond Index (BUSY) has fallen 2.7 percent this year.

Thirty-four percent of economists surveyed by Bloomberg News on Dec. 6 predicted the central bank will start reducing its $85 billion in monthly bond purchases when policy makers next meet on Dec. 17-18.

Slow Inflation

Fed Bank of St. Louis President James Bullard said the odds of a reduction have risen along with gains in the labor market. Any cut should be small because inflation is slow, he said yesterday in St. Louis.

“A small taper might recognize labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014,” said Bullard, who votes on policy this year but not next. “Should inflation not return toward target, the committee could pause tapering at subsequent meetings.”

The Dallas Fed’s Fisher told reporters after a speech in Chicago the central bank should start trimming stimulus straight away as the economy already has “enough firepower.” He votes on policy next year.

Economists predict a government report on Thursday will show growth in retail sales accelerated in November, based on a Bloomberg survey.

Recovery Signs

U.S. employers added more workers last month than analysts forecast and the jobless rate dropped to a five-year low of 7 percent, the Labor Department said last week. Manufacturing (NAPMPMI) expanded at the fastest pace in more than two years, while purchases of new U.S. homes jumped 25.4 percent in October from November, the most in three decades, data this month have shown.

The three-year notes scheduled for sale today yielded 0.64 percent in pre-auction trading, little changed from the previous auction of the securities on Nov. 12. Investors bid for 3.46 times the amount of debt offered in November, the highest level since March at the monthly sales.

Treasuries (BUSY13) due in one to three years have returned 0.4 percent in 2013, data compiled by Bloomberg show.

Treasury 10-year yields may peak at 3 percent after the Fed acts, said Yoshiyuki Suzuki, Tokyo-based head of fixed income at Fukoku Mutual Life Insurance Co., which oversees about $56 billion. “We don’t have to worry about a policy rate increase,” which will limit any advance in yields, he said.

Investors see an 11 percent that chance policy makers will increase their target for the federal funds rate to 0.5 percent or higher by January 2015, based on data compiled by Bloomberg from futures contracts.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

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

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