Treasuries Drop as Plosser Calls for Taper; S&P 500 Rises
Treasuries fell, erasing early gains, as Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank should begin tapering bond purchases in September. The Standard & Poor’s 500 Index rose to a record for a second day and the dollar strengthened.
Ten-year U.S. yields gained one basis point to 2.58 percent at 4 p.m. in New York after losing as much as five points earlier. The S&P 500 added 0.3 percent to 1,680.19 and extended its best weekly gain in six months, while the Dow Jones Industrial Average’s gain was limited as Boeing Co. slid after a fire on a 787 in London. The Bloomberg Dollar Index added 0.3 percent after a two-day slide. Portugal’s bonds and stocks slid on concern political turmoil threatens the nation’s bailout.
Ten-year Treasuries halted a four-day rally after Plosser, who has opposed the Fed’s current round of asset purchases, said the central bank should begin tapering its $85 billion in monthly bond buying in two months and end the unorthodox policy by year-end. Fed Chairman Ben S. Bernanke’s commitment to maintaining accommodative monetary policy helped send the S&P 500 to a record yesterday and fueled a rally in Treasuries.
“We got cheaper last week because we were building in too aggressive of a Fed,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The Fed is just trying to pull away from this accommodation -- they don’t want rates to spike up, so they will keep interest rates lower for longer.”
Benchmark 10-year yields retreated 15.7 basis points this week, the most in 13 months, following a jump of more than 80 basis points in May and June after Bernanke said the central bank was prepared to slow asset purchases, known as quantitative easing, this year if the economy improved.
The S&P 500 rose for a seventh day, its longest rally since March, and jumped 3 percent in the past five days for its biggest full-week rally of the year. The benchmark index closed at its high of the session for the first time since June 6 (SPX), according to data compiled by Bloomberg.
Stocks rallied yesterday as Bernanke said on July 10 that “highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy.” The index has recouped a loss of as much as 5.8 percent triggered when Bernanke told Congress in May that the Fed may taper bond purchases if the economy continues to improve in line with the central bank’s forecasts.
Stocks recovered from their lows of the session today as Fed Bank of St. Louis President James Bullard said the central bank shouldn’t trim its purchases until inflation accelerates toward the central bank’s 2 percent goal. Inflation as measured by the personal consumption expenditures price index rose 1 percent for the year ending May.
“Pulling back on accommodation as inflation is sinking is not the right combination,” Bullard, who votes on monetary policy this year, said today in a Bloomberg Television interview with Michael McKee to air July 15. “I’d like to see us do more” to ensure inflation doesn’t continue to slow.
Financial stocks led the gain in the S&P 500 today after JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. reported earnings that topped analysts’ estimates. Regeneron Pharmaceuticals Inc. jumped 7.3 percent after Lazard Capital Markets Ltd. raised its ratings to buy from neutral. The Dow and Russell 2000 Index also closed at records and the Nasdaq 100 Index rallied for a 13th straight day, matching its longest rally since 1992.
United Parcel Service Inc. (UPS) fell 5.8 percent for the biggest drop in the S&P 500 as it cut its forecast for earnings in 2013, citing a slowing economy.
Boeing (BA)tumbled 4.7 percent, the biggest drop since 2011, and took 38 points off of the Dow as London Heathrow airport was closed to flights after a fire involving a 787 jet operated by Ethiopian Airlines Enterprise. The aircraft, Boeing’s newest model and beset by battery-related fire incidents that grounded the global fleet earlier this year, was parked at a remote stand and coated in fire-retardant foam, images broadcast by Sky Television showed.
The Chicago Board Options Exchange Volatility Index, the benchmark gauge of U.S. options prices, slipped 1.2 percent to 13.84 amid reduced demand for protection against stock losses. The so-called VIX has fallen for seven straight days, the longest streak since 2011.
The Stoxx Europe 600 Index (SXXP) lost 0.1 percent, erasing an earlier 0.6 percent rally. A gauge of technology shares in the Stoxx 600 rallied 1.3 percent as Invensys Plc surged 15 percent. The British maker of industrial software and control systems received a 3.3 billion-pound ($5 billion) offer from Schneider Electric SA. The French maker of low- and medium-voltage equipment retreated 4.1 percent.
Cap Gemini SA advanced 1.8 percent after Infosys Ltd., India’s second-largest software exporter, forecast sales that exceeded analysts’ estimates.
Asian, Emerging Markets
More than three stocks rose for every two that fell on the MSCI Asia Pacific Index, which slipped 0.2 percent today and has gained 2.7 percent this week. The Hang Seng China Enterprises Index dropped 1.2 percent after its biggest one-day advance since January yesterday.
The MSCI Emerging Markets Index added 0.2 percent, sending the gauge 2.9 percent higher this week. Russia’s Micex Index jumped 2.2 percent to its highest level since May, as Bank Rossii left the country’s benchmark interest rates unchanged. The central bank met for the first time with Elvira Nabiullina as chairman. India’s Sensex advanced 1.4 percent, led by Infosys.
The Shanghai Composite Index lost 1.6 percent amid speculation the government will tolerate slower growth.
China’s Finance Minister, Lou Jiwei, speaking yesterday at the U.S.-China Strategic and Economic Dialogue in Washington, said he remains confident of achieving a 7 percent growth rate this year. That’s lower than the government’s target for 2013 of 7.5 percent. A report due on July 15 may show economic growth slowed for a second quarter in the three months to March.
Portugal’s 10-year yield surged 61 basis points to 7.51 percent, the highest level of the year on a closing basis. The PSI 20 Index of stocks slumped 1.1 percent.
Portugal will explore opportunities to do a bond exchange, the nation’s debt agency said today, reiterating plans set out earlier this year. The nation last year exchanged securities due in September 2013 for notes maturing in October 2015. It has started to pre-fund for 2014 borrowing needs, it said.
The cost of insuring Portuguese government debt rose to the highest since November today, with credit-default swaps on the nation rising as much as 75 basis points to 562 basis points, according to data compiled by Bloomberg.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Excessive friction among political parties doesn’t solve any of Portugal’s problems, Foreign Affairs Minister Paulo Portas told the nation’s parliament today. Elections in a hurry would be a mistake, he said.
President Anibal Cavaco Silva said this week that early elections would be undesirable and urged the ruling coalition parties and the main opposition to reach a “national salvation” pact allowing Portugal to complete its aid program.
The euro weakened 0.3 percent to $1.3064 as it declined against nine of 16 major peers.
Germany’s 10-year bund yield slipped six basis points to 1.56 percent. Ireland’s yield declined seven basis points to 3.90 percent as S&P raised the outlook for the nation’s debt rating to positive from stable.
The S&P GSCI gauge of 24 commodities added 0.5 percent as gasoline, heating oil and natural gas rose at least 0.8 percent to lead gains. Crude oil futures added 1 percent to $105.95 a barrel in New York on speculation that U.S. inventories will keep declining after the largest two-week drop in at least three decades.
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