Treasuries Decline as U.S. Economy Accelerates in 4th Quarter

Treasuries fell, heading for a fifth monthly decline, after the U.S. economy accelerated in the fourth quarter, driven by the biggest gain in consumer spending in more than four years and rising exports.

The difference between yields on U.S. 2- and 30-year Treasuries widened to the most on record. The benchmark 10-year note yield increased three basis points, or 0.03 percentage point, to 3.43 percent at 8:55 a.m. in New York, according to BGCantor Market Data. The two-year note yield rose two basis points to 0.59 percent.

“The GDP number was a little bit weaker than expected, but the mix was good as consumer spending was stronger,” said Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. “Unemployment still matters much more than GDP, so I don’t expect us to break this range until we get more news.”

Gross domestic product climbed at a 3.2 percent annual pace from October through December, falling short of the 3.5 percent median forecast of 85 economists surveyed by Bloomberg News and restrained by the biggest drag from inventories in two decades, Commerce Department figures showed today in Washington. Final sales, which includes all categories except stockpiles, rose at a 7.1 percent pace, the most since 1984.

Yield Spread

The difference between U.S. 2- and 30-year yields widened to 4.04 percentage points. It first increased today after Moody’s Investors Service said its timeframe for possibly placing a negative outlook on its Aaa rating for the country’s bonds is shortening as the deficit widens. The fiscal situation is unsustainable in the long run, U.S. Treasury Secretary Timothy F. Geithner said.

“The yield curve is very steep as inflation expectations are being priced into the long end,” LeBas said. “The Moody’s story is also somewhat of a black cloud over the market, even though they are reiterating what they have already said.”

Geithner, in an hour-long interview with broadcaster Charlie Rose, he said that while the U.S. budget deficit is “unsustainable,” it would be a mistake to threaten the recovery by cutting it prematurely. He also said pressure on U.S. state budgets is “diminishing, not intensifying” and that he’ll soon outline a plan for the future of U.S.-owned mortgage companies.

The Fed is scheduled to buy $7 billion to $9 billion of Treasuries due between February 2018 and November 2020 today as part of its plan to spur economic growth by purchasing up to $600 billion in bonds through June.

Inflation Bets

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the securities, widened one basis point to 2.25 percentage points. The figure, which has climbed from 1.47 percentage points in August, has averaged 2.09 percentage points over the past five years.

President Barack Obama has increased the U.S. publicly traded debt to a record $8.86 trillion to sustain the expansion. Credit-default swaps on Treasuries climbed 1.5 basis points to 51.57 basis points, according to data provider CMA. That means it costs $51,570 a year to protect $10 million of debt against default for five years.

Moody’s said yesterday its uncertainty over the willingness and ability of the U.S. to reduce its debt has increased due to the extension of tax cuts enacted under President George W. Bush, the chance Congress won’t reduce spending and the outcome of the November elections.

Time Frame ‘Shortening’

“Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” Moody’s said in its report yesterday. The rating is stable, the company said.

The Obama administration and Congress are debating whether to raise the limit as the government approaches the current ceiling of $14.29 trillion, which the Treasury estimates will be reached between March 31 and May 16.

Republican lawmakers have told the president and Democratic legislators that they will insist on specific cuts as a condition of raising the debt limit.

Treasuries are poised to fall as the fight intensifies, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., was cited by Associated Press as saying.

“The Treasury market will sell off as this get more press and with more invective,” Gross was quoted by AP as saying. “Investors like us, we sell now.”