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Treasuries Decline on Bets Easing Will Stoke Inflation

Treasury 10-year notes fell, snapping four days of gains, before the Federal Reserve releases minutes of its Sept. 12-13 meeting amid speculation monetary easing will bolster the U.S. economy and stoke inflation.

Thirty-year bonds dropped for a second day. The yield spread between 10-year notes and similar-maturity inflation-linked bonds, a gauge of expectations for consumer prices, was 2.48 percent today, up from 1.95 percent at the end of last year. The decline in Treasury prices was limited before a report today that economists predict will show orders placed with U.S. factories dropped in August.

“The U.S. economy may be subdued, but it’s not falling off the cliff,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “As investors become more confident that the central bank will continue to ensure that we get out of this low-growth environment, then they will probably focus on inflation risk rather than deflation risk. This will reduce demand for longer-dated Treasuries.”

The yield on 10-year notes rose two basis point, or 0.02 percentage point, to 1.63 percent at 7:53 a.m. New York time, after climbing to 1.64 percent. The 1.625 percent note due August 2022 dropped 4/32, or $1.25 per $1,000 face amount, to 99 30/32. The 30-year yield added one basis point, to 2.83 percent.

The Fed unveiled a third round of so-called quantitative easing last month with open-ended purchases of $40 billion a month in mortgage-backed securities. Minutes of the Federal Open Market Committee’s September meeting may hint at the introduction of more steps, according strategists at Credit Suisse Group AG.

Additional Measures

“It is possible that the minutes may contain suggestions” for some additional measures, which could be implemented at future FOMC meetings, Credit Suisse strategists led by Michael Chang in New York, wrote in a research note yesterday.

The Fed’s own measure of inflation expectations, the five-year, five-year forward break-even rate, was 2.68 percent today, up from 2.46 percent at the start of the year. The gauge projects the expected pace of consumer price increases over the five-year period beginning 2017.

A Labor Department report due tomorrow will show the U.S. jobless rate rose to 8.2 percent in September from 8.1 percent the prior month, according to the median estimate of economists surveyed by Bloomberg News. Payrolls are forecast to have increased by 115,000, less than the 139,000 average over the first eight months of the year.

U.S. Jobs

The figures will follow a report from ADP Employer Services yesterday that showed jobs gained by 162,000 last month, compared with a revised 189,000 in August.

The U.S. Treasury will today announce the size of bond auctions scheduled for next week. It will probably sell $32 billion of three-year notes on Oct. 9, $21 billion of 10-year debt the next day and $13 billion of 30-year securities on Oct. 11, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance.

Demand for Treasuries was underpinned before data in Europe tomorrow that may show factory orders in Germany dropped, adding to evidence the euro bloc’s debt crisis is hurting the economy, the region’s biggest. Factory orders, adjusted for seasonal swings and inflation, slid 0.5 percent in August from the previous month, a separate survey of economists shows.

Europe Worsening

“The euro area’s core countries, such as Germany, have supported the region’s growth, but their economies are getting worse now,” said Hitoshi Asaoka, a Tokyo-based senior strategist at Mizuho Trust & Banking Co., a unit of Japan’s third-largest lender by market value. “Demand for Treasuries as a safe asset remains strong.”

Spain sold 3.99 billion euros ($5.16 billion) of debt due in 2015, 2014 and 2017. Prime Minister Mariano Rajoy said on Oct. 2 that he has no plans to ask for a bailout soon, damping expectations that a request was imminent.

The European Central Bank meets today and is forecast to keep its benchmark interest rate unchanged at a record low of 0.75 percent.

The Fed is scheduled to buy today as much as $2.25 billion of Treasuries maturing from February 2036 to August 2042 as part of its program to replace shorter-term notes in its holdings with longer-maturity debt.

Treasuries returned 2.4 percent this year, compared with a 1.86 percent gain from Japanese government bonds, according to Bank of America Merrill Lynch indexes. German bonds handed investors a 3.2 percent return during the same period.

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