08 Jun 2009
June 8 (Bloomberg) -- Treasuries fell for a third day on speculation a government report this week on retail sales will add to signs the worst of the U.S. economic recession is over.Ten-year yields rose to the highest level in seven months as the Treasury Department prepared to sell $65 billion in notes and bonds over the next three days, raising concern rates will have to increase to attract investors. Government securities have fallen 6.2 percent this year, heading for their first annual loss in a decade, according to Merrill Lynch & Co.'s U.S. Treasury Master index, as employment and manufacturing improve.
"The economy is bottoming out," said Hideo Shimomura, who oversees $4 billion in non-yen bonds as chief fund investor in Tokyo at Mitsubishi UFJ Asset Management Co., a unit of Japan's largest bank. "Investors should protect their portfolios" against further losses, he said.
The yield on the 10-year note rose six basis points to 3.89 percent as of 1:04 p.m. in Tokyo, according to BGCantor Market Data. The price of the 3.125 percent security maturing in May 2019 fell 1/2, or $5 per $1,000 face amount, to 93 23/32. A basis point is 0.01 percentage point.
Yields on the 2019 notes earlier climbed to 3.90 percent, the highest since Nov. 4, rising from a record low of 2.04 percent Dec. 18. The yield on the two-year note rose seven basis points today to 1.35 percent.
Job Losses
Two-year rates surged 33 basis points on June 5, the most in eight months, after a Labor Department report showed U.S. job losses are abating. The increase in yields was the most since they climbed 47 basis points on Sept. 19, when Federal Reserve Chairman Ben S. Bernanke and then-Treasury Secretary Henry Paulson and announced plans for what became the Troubled Asset Relief Program.
The employment report sparked speculation the Fed will raise interest rates later this year, sending the two-year yield to about 1.1 percentage points more than the upper range of the central bank's target for overnight loans. The spread is the most since 2005. Shorter maturity notes tend to follow what the central bank does with interest rates, while longer maturities are more influenced by inflation.
Retail sales climbed 0.5 percent in May, the first increase in three months, according to the median of estimates in a Bloomberg News survey before the Commerce Department figures on June 11. Industrial production contracted in April by the least since October, the Fed said May 15.
‘Doomsday Scenario'
"There are more people taking the doomsday scenario off the table and thinking a pre-recovery is in place," said Andrew Richman, who oversees $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank's personal-asset management division. "Rates are moving up. The Fed could move the fed funds rate up in the fourth quarter of this year."
Traders see a 70 percent chance the Fed will raise its target rate by its November meeting, based on futures traded on the Chicago Board of Trade. The odds were 24 percent a week ago. The central bank cut its rate to a range of zero to 0.25 percent in December.
Investors also added to bets that inflation will quicken as the economy recovers and the central bank thaws credit markets.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, was 2 percentage points, near the most since September. The figure has averaged 2.24 percentage points for the past five years.
Three-Year Sale
The U.S. plans to auction $35 billion of three-year notes tomorrow, $19 billion in 10-year securities on June 10 and $11 billion in 30-year bonds on June 11.
President Barack Obama may borrow a record $3.25 trillion this fiscal year ending Sept. 30, almost four times the $892 billion in 2008, according to Goldman Sachs Group Inc., one of 16 primary dealers that trade with the Fed.
Fund managers became more bearish on the outlook for Treasuries through year-end, a survey by Ried, Thunberg & Co. shows. The company's sentiment index fell to 40 for the seven days ended June 5 from 42 the week before. A reading below 50 means investors expect prices to fall. The economic analysis firm in Jersey City, New Jersey, surveyed 23 investors controlling $1.37 trillion.
The biggest price swings in Treasury bonds this year are undermining Bernanke's efforts to cap consumer borrowing rates and pull the economy out of the worst recession in five decades. The central bank is scheduled to buy Treasuries due from December 2013 to April 2016 today, and from August 2019 to February 2026 on June 10 as part of the plan.
Rising Volatility
The yield on the benchmark 10-year Treasury note rose last week as volatility in government bonds hit a six-month high, according to Merrill Lynch & Co.'s MOVE Index of options prices. Thirty-year fixed-rate mortgages jumped to 5.45 percent from as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida. Costs for homebuyers are now higher than in December.
Government bond yields, consumer rates and price swings are increasing as the Fed fails to say if it will extend the $1.75 trillion policy of buying Treasuries and mortgage bonds through so-called quantitative easing, traders say. The daily range of the 10-year Treasury yield has averaged 12 basis points since March 18, when the plan was announced, up from 8.6 basis points since 2002, according to data compiled by Bloomberg.
"Volatility has increased dramatically and it seems to get more each day," said Thomas Roth, head of U.S. government-bond trading in New York at Dresdner Kleinwort, also a primary dealer. "A lot of that has to do with uncertainty about whether the Fed will increase purchases of Treasuries. The market is looking for some change in the Fed's plan."
