Treasuries Rise on Factory Weakness Before Fed Rate Decision

Treasuries rose as reports showed below-forecast manufacturing output, giving Federal Reserve policy makers meeting this week more information to weigh as they consider when to raise interest rates.

U.S. debt gained for a second day as national and New York-area manufacturing were weaker than economists’ projections. Policy makers led by Fed Chair Janet Yellen are widely expected to alter or remove the “ patient” phrase from their policy guidance. Demand was also supported by yields that are higher than those available in most industrialized nations.

“The weaker-than-expected numbers are definitely giving a bid to Treasuries,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “It’s really data dependent once she drops the ‘patient’ word.”

Benchmark 10-year yields declined four basis points, or

0.04 percentage point, to 2.07 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader prices.

The yield climbed as high as 2.26 percent on March 6 as job gains in the monthly U.S. employment report fueled speculation the economy is improving enough for the Fed to speed up borrowing-cost increases. Treasuries have lost 0.5 percent this month, according to the Bloomberg U.S. Treasury Bond Index.

Overseas Yields

The European Central Bank this month followed Japan in buying government bonds, which helped cut German yields, sent the dollar surging, and boosted demand for U.S. securities. Ten-year notes yielded as much as 1.2 percentage points more than the average for Group-of-Seven countries last week, the biggest premium since 2006.

Fed policy makers will decide whether to drop or alter their stance on the scope and timing of interest-rate increases later this year. The two-day meeting starts Tuesday.

“We’ve effectively priced in that the ’patient’ rhetoric is going to be left out,” said Edward Acton, a U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed. “Many people are expecting that the longer-term projections might come down a bit in the 2016-2017 area. That’s driven by what the Fed termed the international developments.”

Futures trading shows a 52 percent chance the Fed will increase its target rate to at least 0.5 percent by September, compared with 59 percent on March 6, according to data compiled by Bloomberg.

Factory Slowdown

The 0.2 percent decrease at U.S. manufacturers followed a

0.3 percent drop in January that was initially estimated as a gain, figures from the Fed showed Monday. Total industrial production, which also includes mines and power plants, climbed

0.1 percent, propelled by a record surge in utility use as temperatures plummeted.

A gauge of manufacturing in the New York region unexpectedly declined in March from the previous month, the Fed Bank of New York reported. The Empire State manufacturing index fell to 6.9, versus a forecast of 8 in a Bloomberg survey, from

7.78 last month.

“That’s a direct reflection” of the strength of the dollar versus the euro and other major currencies, said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York.

China’s holdings of U.S. government debt declined for a fifth straight month in January, as Japan pulled within $1 billion of regaining its status as the biggest foreign holder of Treasuries.

Foreign Demand

Signs of capital outflows are mounting in China as economic growth slows, which reduces the need for authorities to buy dollar assets to keep the yuan from strengthening too much. In Japan, the central bank has embarked on record monetary easing to end years of deflation, flooding the financial system with money and resulting in a weaker yen.

“Japan should be on the path, from a Treasury perspective, to becoming a much bigger holder just because of what’s going on in their market and because they’re the kinds of investors that would invest across different markets,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, a primary dealer.

HSBC Holdings Plc said Japanese investors may funnel $300 billion into Treasuries during the next two to three years, double the pace of the nation’s purchases since 2012, with yields on Japanese debt pinned near zero.

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