Treasuries Hold Drop Before Inflation, Manufacturing Data

Treasuries fell for a second day before government reports that economists said will show U.S. consumer prices rose for a second month in September and industrial production increased.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, widened to 2.48 percentage points, above the average of 2.17 percentage points since October 2002. A Labor Department report this month showed the unemployment rate unexpectedly fell in September. The Commerce Department announces housing data tomorrow.

“Jobs and housing data are the drivers which will hopefully lead to a pick up in inflation in time,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. “The best bet for Treasuries is that they will stay in a trading range until there is clarification on policy” after the U.S. Presidential election.

The benchmark 10-year yield climbed two basis points, or 0.02 percentage point, to 1.69 percent at 7:07 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent security due in August 2022 fell 6/32, or $1.88 per $1,000 face amount, to 99 15/32. The yield has climbed from a record low 1.38 percent set on July 25.

Consumer prices rose 0.5 percent last month after increasing 0.6 percent in August, according to the median forecast of 86 economists surveyed by Bloomberg News before the Labor Department data at 8:30 a.m. New York time. A central bank report at 9:15 a.m. will show U.S. manufacturing expanded 0.2 percent in September, following a 1.2 percent decline in August, a separate Bloomberg survey showed.

Higher Yields

“Slow growth will lead to a slow pickup in inflation but it’s not worrisome at the moment,” said Kei Katayama, who buys U.S. government debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $63.1 billion. Treasury “yields should go up slowly but steadily.”

The U.S. unemployment rate fell to 7.8 percent last month, the lowest since President Barack Obama took office in January 2009, the Labor Department said Oct. 5. Housing starts increased 2.7 percent to an annual rate of 770,000 in September, according to a Bloomberg survey before the report tomorrow.

Bond Buying

Fed Bank of Richmond President Jeffrey Lacker said yesterday the central bank’s decision last month to undertake a third round of bond buying will probably give the economy just a little boost because the inflation rate may rise.

“The benefits of that action are likely to be small, because it’s unlikely to improve growth without also causing an unwelcome increase in inflation,” Lacker said in a speech in Roanoke, Virginia.

Fed Bank of New York President William C. Dudley downplayed the risk.

While some observers have said the Fed’s balance sheet expansion “could ultimately prove inflationary,” those fears “are misplaced” because the central bank can keep price increases in check by paying interest on excess reserves, he said yesterday in a speech in New York.

Raising the interest rate the Fed pays on excess reserves is a way policy makers can encourage banks to keep money with the monetary authority instead of funneling it into loans.

The Treasury is scheduled to issue its August report on overseas ownership of U.S. debt at 9 a.m. New York time today. Foreign investors hold $5.35 trillion of Treasuries, or about half the U.S. publicly traded debt, government data show.

Fed Buying

The Federal Reserve plans to buy as much as $5.5 billion of Treasuries due from November 2020 to August 2022 today as part of its plan to lower borrowing costs, according to the Fed Bank of New York’s website.

China is poised to lose its place as the U.S.’s biggest creditor for the first time since the height of the financial crisis, blunting one of Mitt Romney’s favored attacks in the U.S. presidential campaign.

Chinese holdings of Treasuries fell 0.2 percent this year through July to $1.15 trillion, the latest government data show. Japan, a stronger ally of the U.S., raised its stake by 5.6 percent to $1.12 trillion, on pace to top the list of foreign creditors by November.

While Romney promises to label China a currency manipulator if he wins the election and says Obama has been too lenient in trade disputes, foreign demand is a reason Treasury yields remain close to record lows, reducing the cost of credit for the government, companies and individuals. Whoever wins Nov. 6 will depend on both nations to finance a budget deficit that surpassed $1 trillion for a fourth year in fiscal 2012.

“We would still have a great need for overseas money,” Dominic Konstam, head of interest-rate strategy in New York at Deutsche Bank AG, one of the 21 primary dealers that trade with the Fed, said Oct. 11. “Whatever deficit we’re running, we’re going to supply a lot of Treasuries and someone’s going to buy them, and if it’s not China it will be someone else.”

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