The difference between yields on U.S. 10-year notes and Treasury Inflation Protected Securities increased to the most in three years before reports this week forecast to show consumer prices are gaining at a faster rate.
Yields on 10-year notes traded at almost a seven-week high as the U.S. prepared to sell $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds in three auctions starting tomorrow. Federal Reserve policy makers William Dudley and Janet Yellen said the economy isn’t strong enough to ease stimulus.
“The judgment of millions of investors can’t be overlooked, and that’s what the Treasury and TIPS market reflects about investors’ beliefs about inflation,” Anthony Crescenzi, a bond strategist at Newport Beach, California-based Pacific Investment Management Co., said in an interview on Bloomberg TV. “The Fed needs to worry that others are worried about it.” The firm manages the world’s biggest bond fund.
The difference between yields on 10-year TIPS and comparable Treasuries, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, was 2.66 percentage points at 5 p.m. in New York. Earlier it widened to 2.67 percentage points, the most since March 2008. The average for the five years before the onset that year of the financial crisis was 2.42 percentage points. It touched 2.74 in May 2006.
Ten-year yields rose less than one basis point, or 0.01 percentage point, to 3.58 percent, according to Bloomberg Bond Trader prices. The 3.625 percent note due in February 2021 fell 1/32, or 31 cents per $1,000 face amount, to 100 11/32.
The benchmark yields touched 3.61 percent on April 8, the highest since Feb. 18. Thirty-year bond yields increased one basis point to 4.65 percent, and two-year notes yielded 0.82 percent, up two basis points.
Treasuries pared earlier losses as commodities and stocks gave up gains. Crude oil for May delivery traded at $108.84 a barrel in New York after reaching $113.46, the highest since September 2008. The Thomson Jefferies/Reuters CRB Index of raw materials was at 366 after touching 368.96, also a 30-month high, and the Standard & Poor’s 500 Index declined 0.3 percent.
The 10-year yield will increase to 3.90 percent by year-end, according to the weighted-average forecast of 71 economists in a Bloomberg News survey.
Six-month bill rates touched to a record-low 0.0946 percent today, with the Treasury reducing issuance of shorter-term securities and a Federal Deposit Insurance Corp. fee change prompting some investors to stop lending the debt.
Consumer Price Data
Consumer prices gained 2.6 percent in March from a year earlier, from a 2.1 percent in February, according to the median forecast in a Bloomberg survey before a Labor Department report on April 15. Core prices, which exclude food and fuel, may have risen at an annual pace of 1.2 percent, from 1.1 percent.
“The fears have changed from deflation concerns to inflationary concerns as the risk of a double dip has receded and we get ready to embark on a Fed tightening campaign that the market has never experienced before,” said Michael Cloherty, New York-based head of U.S. rates strategy for fixed income and currencies at Royal Bank of Canada, one of 20 primary dealers that trade with the central bank. “Inflation numbers should track higher, but we probably won’t get a sharp breakout.”
A bond-market measure of inflation expectations that the Fed uses to help determine monetary policy, the five-year, five-year forward break-even rate, was 3.0 percent, compared with a 2.77 percent average over the past five years.
Real yields, Treasury yields minus year-over consumer prices, aren’t flagging structural concern. The benchmark 10-year note’s real yield was 2.49 percent, compared with a 20-year median of 2.68.
New York Fed President Dudley said today the Fed shouldn’t be overly enthusiastic about removing record stimulus. The central bank is buying $600 billion in Treasuries through June and has held its benchmark interest rate at zero to 0.25 percent since December 2008 to support economic growth.
“We’re probably going to have excess slack in the U.S. labor market at least through the end of 2012,” Dudley told a forum in Tokyo.
The unemployment rate is 8.8 percent, Labor Department data showed on April 1.
Fed Vice Chairman Yellen said increases in commodities will have only a temporary effect on inflation and don’t warrant a reversal of stimulus. The U.S. economy doesn’t seem to be experiencing the kind of “sharp rebound” that usually follows a deep recession, she said in a speech in New York.
‘Below Normal Levels’
“I see weak demand for labor as the predominant explanation of why the rate of unemployment remains elevated and rates of resource utilization more generally are still well below normal levels,” Yellen said.
The Fed bought $7.86 billion of Treasuries today maturing from October 2016 to September 2017.
Treasuries have lost 0.6 percent this year after gaining 5.9 percent in 2010, according to Bank of America Merrill Lynch’s Treasury Master index. The Standard & Poor’s 500 Index has risen 5.3 percent this year.
Yields are still below levels seen in the past decade. Ten-year yields climbed as high as 5.53 percent in May 2001. The figure has averaged 4.17 percent over the past 10 years.