Treasury Market Inflation Expectations Rise

Treasury market inflation expectations climbed to a three-month high before a government report economists project will show house prices rose at the fastest pace in six months.

Inflation swaps, which allow investors to exchange fixed interest rates for returns equivalent to the consumer price index, show investors expect prices to increase at an annual pace of 2.49 percent. The reading yesterday was the highest since Oct. 11. The Federal Reserve is scheduled to buy as much as $1.75 billion of Treasuries due from 2036 to 2042 today as part of its efforts to support the economy.

“The continuous expansion of the Fed’s balance sheet at least this year and improvement in U.S. economic indicators” are behind the gain in inflation expectations,’’ said Hitoshi Asaoka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s third-largest bank by market value. “There are expectations for a pickup in the U.S. economy.”

U.S. 10-year yields were little changed at 1.84 percent as of 11:30 a.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in November 2022 was 98 2/32.

Japan’s 10-year yield rose one basis point, or 0.01 percentage point, to 0.74 percent, a day after the Bank of Japan announced plans to start open-ended debt purchases in 2014 to help end deflation.

The nation’s bonds yield more than the U.S. counterparts after accounting for the cost of living. The so-called real 10-year yield is 0.94 percent, reflecting a 0.2 percent decline in consumer prices in November from the year before.

U.S. 10-year notes yield 0.14 percent after subtracting the nation’s 1.7 percent inflation rate.

Comparative Returns

While Treasuries have handed investors a 0.3 percent loss this month, Japan’s government securities gained 0.4 percent, according to Bank of America Merrill Lynch indexes.

The Federal Housing Finance Agency house price index probably gained 0.7 percent in November from October, the biggest increase since May, according to the median estimate of economists surveyed by Bloomberg News before the report at 9 a.m. New York time today.

An index of leading indicators tomorrow probably gained 0.4 percent in December, based on responses from economists.

New home sales climbed 2.1 percent, according to another Bloomberg survey before the report Jan. 25.

The difference between rates on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.55 percentage points yesterday. It was the most since Nov. 2.

U.S. consumer prices advanced 1.7 percent in December from the year before, based on the most recent data from the Labor Department. The average over the past 20 years is 2.5 percent.

The Fed is purchasing $85 billion of government and mortgage debt each month to spur the economy by putting downward pressure on bond yields. The BOJ is buying bonds and other assets, and it plans to follow the Fed by switching to open-ended debt purchases next year.

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