Treasuries Set for Weekly Decline Before Economic Data Release

Treasury 10-year notes headed for the longest streak of weekly losses in 19 months before a report economists said will show consumer spending gained last month, stoking speculation the central bank will slow asset purchases.

Five-year notes declined for a second day amid concern money printing by the Federal Reserve will fuel inflation and sap demand for fixed-income assets as the economy recovers. The Fed may need to slow or stop its so-called quantitative easing program in response to an accelerating economy next year, Philadelphia Fed President Charles Plosser said yesterday. Yields indicate traders are adding to bets inflation will quicken as the economic outlook improves.

“The economic data has been much better than predicted, pointing to the fact that the bullish fixed-income market is behind us,” said Matteo Regesta, a fixed-income strategist at BNP Paribas SA in London. “The landscape will be one of higher yields from here.”

The benchmark 10-year yield advanced one basis point to 3.36 percent as of 6:43 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 fell 1/32 or 31 cents per $1,000 face amount to 93 28/32. The two-year yield was little changed at 0.64 percent, while that on the 1.375 percent security due 2015 increased one basis point to 2.02 percent.

Government Borrowing

Ten-year yields have climbed almost half a percentage point in the past four weeks and are set for the longest run of increases since May 2009, when rates completed a seven-week gain on concern government borrowing would overwhelm demand.

Treasuries handed investors a 2.1 percent loss this month, according to Bank of America Merrill Lynch indexes. The last time U.S. sovereign debt fell more in a month was in December 2009, when it dropped 2.6 percent.

Spending by U.S. consumers, which accounts for about 70 percent of the economy, rose 0.5 percent after a 0.4 percent gain in October, according to the median estimate of economists surveyed by Bloomberg News before the data today. Bed Bath & Beyond Inc., the Union, New Jersey-based home-products retailer, yesterday increased its earnings forecast.

A separate report may show bookings for durable goods, excluding cars and planes, advanced 1.8 percent.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, was at 2.31 percentage points today, from this year’s low of 1.47 percentage points in August. The average for the past five years is 2.09 percentage points.

Fed Reaction

“If the growth rate of the economy continues to strengthen and looks sustainable, then I am going to be looking for the Fed to react to that,” Plosser said yesterday in an interview on Bloomberg Radio’s “The Hays Advantage,” with Kathleen Hays. “That may be to cut back on the degree of accommodation in a gradual way. One way would be to begin stopping some of the purchases or slowing them down.”

The Fed plans to add $600 billion to the economy by buying Treasury securities, while President Barack Obama agreed to extend tax cuts to spur growth.

The Treasury is scheduled to announce today the sizes of two-, five- and seven-year auctions scheduled for next week.

It will probably sell $99 billion of notes, according to a Bloomberg News survey of 13 primary dealers, unchanged from November’s auctions of the securities.

December’s advance in U.S. yields reflects expectations for economic growth, said Peter Jolly, the Sydney-based head of market research for the investment-banking unit of National Australia Bank Ltd., the nation’s largest lender. Inflation has been held in check, and that will support bonds, he said.

Preferred Price

“The U.S. economy, although it is recovering, has very little inflation,” Jolly said. “Yields have risen quite a long way. There’s a fair bit of the recovery story in yields.”

Today’s spending report will also show the Fed’s preferred price measure, which excludes food and fuel, rose 0.9 percent from a year earlier, economists said. The figure would match October’s, which was the smallest since records began in 1960.

Ten-year rates will decline to 3.3 percent by March 31 and then advance to 4 percent by the end of 2011, Jolly said.

A Bloomberg survey of banks and securities companies projects the yield will rise to 3.53 by the close of next year, with the most recent forecasts given the heaviest weightings. Investors who bought today would earn 2 percent, reflecting both price declines and interest payments, according to data compiled by Bloomberg.

Client Withdrawals

Bond mutual funds had the biggest client withdrawals in more than two years last week.

U.S. bond funds experienced withdrawals of $8.62 billion in the seven days ended Dec. 15, up from $1.66 billion the week before, according to the Investment Company Institute, a Washington-based trade group.

Financial markets are closed today in Japan for a holiday. Trading of Treasuries is scheduled to stop at 2 p.m. in New York and stay shut tomorrow worldwide for Christmas, according to the Securities Industry and Financial Markets Association website.

U.K. trading will remain closed Dec. 27 and Dec. 28 in observance of Christmas and Boxing Day, according to the association.

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