Treasuries Fall as Market Opens After Sandy, Home Prices

Treasuries fell as the market opened following yesterday’s closure for Atlantic storm Sandy and before a report that economists forecast will show a gauge of business sentiment improved in October.

Government debt was set to deliver a third month of losses, the longest streak since the last quarter of 2010, after the Federal Reserve announced a new round of measures on Sept. 13 to spur growth. Yields that are less than the inflation rate led investors to seek higher returns in corporate bonds and stocks. Treasury 10-year note futures fell yesterday after a report showed U.S. house prices rose the most in more than two years.

“Most of the U.S. data we’ve seen recently surprised on the upside,” said Jussi Hiljanen, the head of fixed-income research at Skandinaviska Enskilda Banken AB in Stockholm. “The housing market is definitely one of the bright spots. We expect 10-year Treasury yields to rise to around 2 percent in the second quarter of next year.”

U.S. 10-year rates rose three basis points, or 0.03 percentage point, to 1.75 percent as of 7:01 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent note due in August 2022 fell 10/32, or $3.13 per $1,000 face amount, to 98 27/32.

Trading in Treasuries was shut yesterday and closed early on Oct. 29 as Sandy swept through the U.S. East Coast.

Business Sentiment

The Institute for Supply and Management-Chicago Inc. will say today that its business barometer increased to 51 this month from 49.7 in September, according to a median forecast of 54 analysts in a Bloomberg survey. A reading of 50 is the dividing line between expansion and contraction.

The S&P/Case-Shiller index of property values in 20 U.S. cities rose 2 percent in August from a year earlier, the biggest gain since July 2010, a report showed yesterday. The Citigroup Economic Surprise Index, which shows whether U.S. data beat or fell short of forecasts, climbed to 55.5 on Oct. 15, the most since February. It was at 50.2 yesterday.

U.S. consumer prices increased 2 percent in September from 12 months before, based on the latest data from the Labor Department.

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for costs in the economy over the life of the debt, was 2.48 percentage points. The average over the past decade is 2.17 percentage points.

Yield Projections

“The U.S. economy is recovering,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “There’s no reason to buy at negative real yields.”

Ten-year rates will climb to 2.04 percent by June 30 and to 2.33 percent by the end of 2013, based on a Bloomberg survey of economists, with the most recent projections given the heaviest weightings.

Treasuries have handed investors a 0.3 percent loss this month as of Oct. 29, and the three-month decline is 0.8 percent, the Bank of America figures show.

Bonds in an index of U.S. investment-grade and high-yield corporate securities gained 2.5 percent since the end of July, according to the data. The MSCI All-Country World Index of shares returned 4.4 percent including reinvested dividends in the period, according to data compiled by Bloomberg.

Ten-year Treasury yields will probably hold below 2 percent for the weeks ahead, said Ali Jalai, who trades U.S. debt in Singapore at Scotiabank, a unit of Bank of Nova Scotia, one of the 21 primary dealers authorized to deal with the Fed.

“We’re in a low-yield environment,” he said. “The economy’s not falling apart, but it’s not that strong.”

Fed Policy

The Fed reiterated Oct. 24 it will keep its main interest rate at almost zero until at least mid-2015 and buy $40 billion of mortgage debt every month, seeking to “substantially” improve the outlook for the labor market.

The U.S. jobless rate rose to 7.9 percent in October from 7.8 percent in September, according to a Bloomberg News survey of economists before the Labor Department reports the figures on Nov. 2. It will be the last of the monthly employment reports before President Barack Obama and Republican challenger Mitt Romney face off in the Nov. 6 election.

The Fed is also swapping its holdings of shorter-term Treasuries with those due in six years to 30 years to put downward pressure on long-term borrowing costs.

The central bank plans to buy as much as $5.25 billion of securities due from November 2018 to August 2020 today as part of the program, according to the Fed Bank of New York’s website.

Investor demand for long-term debt narrowed the difference between five- and 30-year yields to 2.13 percentage points yesterday, the least in seven weeks. The spread was at 2.15 percentage points today.

The U.S. is scheduled to announce today the sizes of three auctions of coupon-bearing securities scheduled for next week.

It will probably sell $32 billion of three-year debt on Nov. 6, $24 billion of 10-year notes the next day and $16 billion of 30-year bonds on Nov. 8, according to Wrightson ICAP LLC, an economic advisory company based in Jersey City, New Jersey.

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