Treasuries Set for Third Weekly Decline on Interest-Rate Outlook

  • Benchmark 10-year note yield climbs to highest in six weeks
  • U.S. debt falls 1.2% in past month, biggest loss after Canada

Treasury 10-year notes headed for a third weekly decline as speculation of higher interest rates this year from the Federal Reserve gathered momentum.

With global stock markets and commodities showing signs of recovering from the slumps seen in the first two months of 2016, demand for the relative safety of U.S. sovereign debt has eased. Added to that, bets the Fed will stay on course for tighter policy are growing as the economy improves, further weighing on Treasuries and driving 10-year yields to their highest in six weeks. Treasuries have been the worst performers after Canadian bonds in the past month among global sovereign debt.

“U.S. data have been less disappointing versus the market consensus since the start of the year,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “That is reflected in the increase of the 10-year Treasury yield.” He forecasts two Fed rate increases this year and so 10-year yields could “rise above the 2 percent mark.”

Benchmark 10-year note yields rose three basis points, or 0.03 percentage point, to 1.97 percent as of 10:42 a.m. New York time, according to Bloomberg Bond Trader data, the highest on an intraday basis since Jan. 29. The price of the 1.625 percent security due in February 2026 fell 9/32, or $2.81 per $1,000 face amount, to 96 30/32. The yield has increased nine basis points this week.

Citigroup’s Economic Surprise Index for the U.S., which measures the strength of data relative to analysts forecasts, climbed to minus 9.8 Thursday, the highest closing level since November. While still below zero, which shows data releases have been undershooting predictions, the gauge has risen from an eight-month low of minus 55.7 reached on Feb. 4.

Treasuries have declined 1.2 percent in the past month, based on Bloomberg World Bond Indexes, which track 26 nations. The only market that has fallen more is Canada’s, which handed investors a 1.7 percent loss. 

Fed Rates

Futures traders see about a 78 percent chance of an interest-rate increase by the Fed’s December policy meeting. As recently as Feb. 11, that probability was as low as 11 percent, according to overnight indexed swaps data compiled by Bloomberg.

The $87.8 billion Pimco Total Return Fund loaded up on government securities just in time for a tumble in the market. Government and related debt comprised 35 percent of holdings at the end of February, the most in a year, according to the fund reports on the company’s website.

The fund, run by Pacific Investment Management Co. in Newport Beach, California, has fallen 0.2 percent in the past year, lagging behind 67 percent of its peers, according to data compiled by Bloomberg. In addition to Treasuries, the Total Return Fund’s stake in government securities can include related investments such as inflation-protected bonds, futures contracts and agency debt, according to the Pimco website.

It’s time to move into investment-grade corporate bonds and other credit products because the U.S. economy will probably avoid a recession, Mark Kiesel, one of the three Total Return managers, said this week.

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