Treasuries dropped, with 10-year notes falling the most in two weeks, after the cost of living accelerated in May in a signal inflation may move closer to the Federal Reserve’s goal as policy makers meet.
Treasury two-year note yields climbed to the highest level since September as Fed officials debated the slowing of asset-buying and when to start raising interest rates before tomorrow’s announcement. Eurodollar futures, the world’s most actively traded short-term interest-rate contract, are underestimating the pace of tightening over the next two years, according to 55 percent of 56 economists in the June 12-16 survey by Bloomberg News.
“Inflation over the last three months or so seems to be accelerating fairly broadly,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “Ultimately, it’s really about what the Fed says and does tomorrow.”
The 10-year note yield rose five basis points, or 0.05 percentage point, to 2.65 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. It earlier added six basis points, the largest gain since June 3. The price of the 2.5 percent note maturing in May 2024 fell 15/32, or $4.69 per $1,000 face value, to 98 21/32.
The two-year yield gained one basis point to 0.48 percent after rising to 0.49 percent, the highest since Sept. 6, and up from 0.32 percent on May 20.
The yield difference between two- and 10-year Treasury notes expanded five basis points to 217 basis points, after falling to 207 on May 28, the least since June 19, based on closing prices. The one-year average is 233. A wider yield curve suggests investors have boosted growth expectations.
Treasuries dropped after the consumer price index increased 0.4 percent, the biggest advance since February 2013, after climbing 0.3 percent the prior month, a Labor Department report showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg called for a 0.2 percent increase. Excluding volatile food and energy prices, the gain was the largest in almost three years.
A separate Commerce Department report showed that builders broke ground on more than 1 million U.S. homes in May for a second month, indicating the industry is picking up after a weather-induced slump to start the year.
“There is inflation -- you can feel it, you can see it as a consumer -- now it’s starting to creep into the actual numbers,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. The Federal Open Market Committee is “going to see these numbers, and hopefully we’ll get some kind of dialog.”
Traders are pricing in a 63 percent chance policy makers will raise interest rates by July next year.
The Fed is reducing its monthly bond purchases, while keeping the target for overnight lending between banks in the range of zero to 0.25 percent where it has been since 2008. Officials signaled at their April 29-30 meeting that interest rates will stay low for a “considerable time.”
Treasuries gained yesterday after the International Monetary Fund said it now sees the world’s largest economy growing 2 percent this year, down from an April estimate of 2.8 percent. The IMF left a 2015 prediction unchanged at 3 percent, and said it doesn’t expect the U.S. to see full employment until the end of 2017, amid slow inflation.
For the Fed, the forecast means “policy rates could afford to stay at zero for longer than the mid-2015 date currently foreseen by markets,” the Washington-based IMF said in its annual assessment of the U.S. economy.
The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, rose 0.03 percentage point to 2.21 percentage points. That’s down from this year’s high of 2.31 set in January and compares with the average for the past decade of 2.20 percentage points.
The Fed “certainly can’t ignore it,” said Chris McReynolds, head of Treasury trading at Barclays Plc, one of 22 primary dealers that trade with the Fed. “They have to acknowledge it to some degree. Even before the number today they were already at their year-end projections” for unemployment and the central bank’s preferred measure of inflation, the personal consumption expenditures deflator.
Fed officials, at the March 19 meeting, forecast unemployment would end the year at a rate between 6 percent and 6.5 percent. The measure was 6.4 percent last month, the Labor Department said. Policy makers forecast year-end PCE at 1.3 percent to 1.8 percent. The PCE deflator rose 1.6 percent in April from the year-ago period, Commerce Department data show.
Treasuries have returned 2.8 percent this year through yesterday, compared with 5.3 percent for U.S. investment-grade company debt and 5.4 percent for high-yield securities denominated in dollars, based on Bloomberg indexes.
The government is scheduled to sell $7 billion of 30-year Treasury Inflation-Protected Securities June 19.
The gap between yields on 30-year TIPS and non-indexed government debt of comparable maturity widened 0.02 percentage point to 2.30 percentage points, down from a 2014 high of 2.45 percentage points in January, which is also the 10-year average.