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U.S. Treasuries Fall as Inflation Data Suggest Fed Will Keep Pace on Rates
April 29 (Bloomberg) -- U.S. Treasuries fell as a report on consumer spending and inflation suggested the Federal Reserve will maintain its pace of raising interest rates this year.
Fed policy makers track the report's inflation figure excluding volatile energy prices. That core measure, compiled by the Commerce Department, was up 1.7 percent from March last year compared with a 1.6 percent annual pace in February. The Fed next week is expected to raise its target for overnight bank lending for the eighth straight time since June, to 3 percent.
``All indicators point to inflation edging higher, the market is worried and so is the central bank,'' said Anthony Karydakis, chief fixed-income economist at J.P. Morgan Fleming Asset Management in New York, with $400 billion in assets. ``The Fed will keep on moving despite the slowdown in the economy.''
The benchmark 4 percent note of February 2015 fell more than 3/8, or $2.75 per $1,000 principal, to 98 13/32 at 5:05 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield rose 5 basis points or 0.05 percentage point to 4.20 percent after dropping yesterday to 4.14 percent, the lowest since mid-February.
The 3 5/8 percent note maturing in April 2007, the most sensitive to changes in benchmark rates, fell more than 1/8 to 99 31/32 while its yield rose 8 basis points to 3.64 percent. The note's yield declined 5 basis points this week and almost half a percentage point this month.
Treasuries fell even as the University of Michigan's consumer confidence index for April fell to 87.7 from 88.7 in the previous month. Another report showed manufacturing in the Chicago area declined in April. The 10-year note's yield of 4.16 percent is the lowest since mid-February.
Perplexing Yields
Accelerating inflation erodes the value of fixed-income payments on debt securities, and may encourage the Fed to keep raising rates at its remaining six meetings this year. The Fed in its regional economic activity report on April 20 said ``many districts suggested upward price pressures have strengthened.''
``It's very difficult to justify a 10-year below 4.2 percent when the Fed is going to continue to raise rates well through 3.75 percent this year,'' said Joseph Di Censo, a fixed-income strategist at Lehman Brothers Inc. in New York, one of the 22 primary dealers of U.S. government securities that trade with the Fed's New York branch.
Traders in interest-rate futures boosted expectations about the level of U.S. rates at the end of the year, following today's reports. The yield on the December Eurodollar futures contract rose to 3.93 percent, from 3.87 percent yesterday. A month ago the yield reached 4.34 percent, the highest this year.
The futures contracts settle at a three-month lending rate that averaged 21 basis points higher than the Fed's target over the past decade. They trade on the Chicago Mercantile Exchange.
Signs of Slowing
Other reports in the past month including gross domestic product and retail sales were short of forecasts, suggesting slower economic growth and boosting demand for Treasuries. The 10- year note's yield has tumbled half a percentage point from its year-to-date high of 4.69 percent on March 23.
Still, U.S. growth exceeds the pace in Europe and Japan. The European Commission earlier this month cut its 2005 growth forecast to 1.6 percent from 2 percent for the 12 nations that use the euro as currency. Japanese growth is forecast at 0.9 percent, based on the median estimate among economists surveyed by Bloomberg.
``I think the market is speculating that growth alone is going to keep the Fed at bay or stop them,'' Di Censo said. ``It's premature to start talking about growth when you have only one month of data.''
GDP, Inflation
Gross domestic product expanded at a 3.1 percent annual rate in the first quarter, slower than the 3.8 percent in the prior three months, the Commerce Department reported yesterday. The inflation measure, known as the GDP deflator, rose 3.2 percent, higher than the median estimate of 2.3 percent.
Fed policy makers raised the target for overnight bank lending by a quarter percentage point to 2.75 percent at their last meeting on March 22 and stuck to a ``measured'' stance on future increases. It was the seventh increase since last June, when the target was a four-decade low of 1 percent.
All 81 economists in a Bloomberg News survey expect the Fed to raise the target at the May 3 meeting.
A monthly index of manufacturing in the Chicago declined to 65.6 in April from 69.2 percent a month earlier. Economists polled by Bloomberg expected the index to decline to 62.5. A reading above 50 means manufacturers reporting improved business conditions outnumber those with the opposite view.
To contact the reporters on this story:
Vivianne C. Rodrigues in New York at at
[email protected]
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