US 10-year yield stable amid speculation

Published Feb 19, 2013

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Edinburgh - Treasury 10-year yields were within one basis point of 2 percent amid speculation minutes of the Federal Reserve’s latest policy meeting, due tomorrow, will provide more detail on the timing of a withdrawal of stimulus.

Signs of strengthening growth have encouraged economists to raise their year-end forecasts for US 10-year yields to 2.32 percent, from 2.14 percent in the first week of January, according to Bloomberg surveys, with the most recent predictions given the heaviest weightings.

The previous Fed minutes on January 3 showed policy makers were divided on whether to end bond purchases in the middle or end of this year.

Ten-year yields climbed to an eight-month high the next day.

“On the one side we have the Treasury purchases from the Fed, which of course is an element to keep yields low, and on the other hand you have somewhat better news” on the economy, said Piet Lammens, head of research at KBC Bank NV in Brussels.

“We were a bit surprised at the previous minutes. So there was some ground to be concerned about the duration of this program.”

Ten-year yields were little changed at 1.992 percent as of 7 a.m. New York time, according to Bloomberg Bond Trader data.

The price of the 2 percent notes due in February 2023 was at 100 1/16.

Treasuries trading resumed today after being closed worldwide yesterday for a public holiday in the US.

Yields have climbed 23 basis points, or 0.23 percentage point, since December 31.

They are less than the 10-year average of 3.63 percent.

The rate may climb to 2.75 percent by the end of 2013, Lammens said.

Market Risk

The Fed minutes are a “risk” for the market, Matthew Hornbach, Morgan Stanley’s head of US interest rate strategy in New York, wrote in a report February 15.

“We continue to see the risks skewed toward higher Treasury yields,” the report said.

Investors may consider adding to holdings if rates push higher this month or next, according to Morgan Stanley, one of the 21 primary dealers that trade directly with the Fed.

The central bank said after its last meeting that it is committed to buying about $85 billion of government and mortgage securities a month to support growth in the world’s biggest economy.

The Commerce Department will say tomorrow that building permits, a proxy for future construction, climbed 1.2 percent in January to a 920,000 annual rate, the highest since July 2008, according to the median estimate in a Bloomberg survey of economists.

New residential construction slipped in January, a separate report will say tomorrow, and US existing-home sales slowed, data February 21 will show, based on responses from economists.

Inflation Estimates

Labor Department data on February 21 will show US consumer prices rose 1.6 percent in January from the year before, slowing from 1.7 percent in December, according to a separate Bloomberg survey.

The central bank’s price indicator for the period from 2018 to 2023, known as the five-year five-year forward break-even rate, climbed to 2.97 percent last week, the most since August 2011.

While rates are rising, the increase may not be enough to justify the government forecasts for economic growth.

The Office of Management and Budget predicts yields on 10- year notes will average 4.1 percent in 2015 and 4.9 percent in 2017 as the economy expands at about a 4 percent rate in the second half of President Barack Obama’s term.

Bond prices suggest the yield will average below 3 percent two years from now, implying that gross domestic product will fall short of OMB projections, according to data compiled by Bloomberg.

Treasury borrowing costs just above last year’s record lows mean easy credit for consumers and companies as well as sustained demand for riskier assets such as stocks. The record- low 10-year rate was 1.38 percent set in July.

“Clearly, the bond market is on one end of the spectrum and these guys are on the other end, believing rates are going to go up so fast,” Priya Misra, the head of US rates strategy at Bank of America Merrill Lynch in New York, another primary dealer, said February 8 in a telephone interview.

“The 10-year yield rising to about 5 percent in four years is too optimistic,” Misra said. - Bloomberg

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