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Treasuries Head for Weekly Advance on Signs Rates Won't Rise Much Further
Dec. 16 (Bloomberg) -- U.S. Treasuries are poised for the biggest weekly gain in five on speculation the Federal Reserve is nearing the end of interest-rate increases.
Treasuries have advanced since the central bank on Dec. 13 signaled in its monetary policy statement that interest rates are no longer stimulating economic growth. Signs inflation isn't accelerating pushed yields in the past two days to the lowest this month. The government yesterday said the annual rate of inflation in November was the slowest since July.
``The Fed's statement helped support expectations that interest rates don't need to rise significantly further,'' said Daniel Pfaendler, head of interest-rates strategy at Dresdner Kleinwort Wasserstein in Frankfurt. ``That is a good development for the long-end.''
The yield on the benchmark 10-year note was 4.45 percent as of 6:55 a.m. in New York, according to bond broker Cantor Fitzgerald LP. Bond yields move inversely to prices. The yield has dropped 8 basis points this week, the most since the week ended Nov. 11. A basis point is 0.01 percentage point.
The price of the 4 1/2 percent note due in November 2015 rose 3/32, or 94 cents per $1,000 face amount, to 100 13/32. The yield may fall a further 10 basis points by the end of the year, Pfaendler said.
The Labor Department yesterday said inflation slowed to an annual rate of 3.5 percent last month. The consumer price index fell 0.6 percent in November from a month earlier, the most since July 1949, after a 0.2 percent gain in October. Excluding food and energy, prices rose 0.2 percent, the same as the month before.
`Fewer Inflation Pressures'
``Interest rates don't look like they'll rise much further from here and with fewer inflation pressures, that's keeping Treasuries steady,'' said Satoshi Asai, who helps oversee $1 billion of bonds at Sompo Japan Asset Management in Tokyo, a unit of Sompo Japan Insurance Inc., the nation's third-largest casualty insurer. ``We are looking to buy on dips.''
The yield on the 10-year note may fall to 4.3 percent by the end of the year, Asai said.
Reports from the Fed's New York and Philadelphia branches showed indexes of prices paid for energy and raw materials dropped this month.
The Fed has raised the target for the overnight lending rate between banks 13 times since June 2004, to 4.25 percent from 1 percent. The rate is now the highest in more than four years. Policy makers next meet in January and March.
Yields on interest-rate futures show traders are pricing in a 90 percent chance of the Fed raising rates again to 4.5 percent on Jan. 31 and a 58 percent chance of another quarter-percentage point increase on March 28.
`Considerable Rally'
``Inflation remains steady. That's consistent with slower growth and the Fed stopping within the next one to two meetings,'' said Stuart Thomson, a fixed-income strategist at Charles Stanley Sutherlands in Edinburgh, Scotland. ``There'll be a considerable rally over the next few months.''
Thomson said the yield on the 10-year note could fall to 3.75 percent next year.
The central bank this week stopped saying there is ``accommodation'' in its policy, suggesting they're at or near a neutral rate that neither spurs nor restrains growth.
Gains in Treasuries may be tempered amid signs the economy is gaining strength. Treasury Secretary John Snow on Dec. 14 said the economy will grow by as much as 4 percent in 2006.
Improving Economy
The manufacturing indexes of the New York and Philadelphia Fed showed factories in the regions increased production this month. The two reports suggest that U.S. manufacturing will support economic growth this quarter as energy costs decline and rebuilding along the Gulf Coast, after Hurricanes Katrina and Rita, generates new factory orders.
``It's difficult to hold Treasuries with the macro-economic situation in the U.S. still improving,'' said Tadashi Tsukaguchi, who help oversees $4 billion of debt at Merrill Lynch Investment Management in Tokyo. ``We are planning to sell our Treasury holdings.''
The 10-year yield may rise to 4.7 percent by the end of February, Tsukaguchi said.
Economists surveyed by Bloomberg News between Nov. 30 and Dec. 8 boosted forecasts for gross domestic product in the current quarter and the first quarter of 2006.
The economy will expand 3.3 percent in the three months to Dec. 31 and quicken to 3.8 percent next quarters, according to the median estimate of 72 economists. In last month's survey, the forecast was for a 3 percent growth rate this quarter, and 3.6 percent in the next.
Yield Gap
The gap between two- and 10-year yields was 10 basis points today, near the narrowest since 2001. The shrinkage causes the yield curve, which charts the yields of bonds of different maturities, to flatten. That happens when yields on shorter- maturity securities rise and yields on longer-dated notes fall, or when both occur at the same time.
Ten-year yields haven't fallen below two-year yields, a phenomenon known as an inverted yield curve, since December 2000.
An inversion, where short-term yields exceed long-term rates, occurred prior to each of the past four U.S. recessions. The last time the curve was inverted was in 2000, before a recession that began in March 2001. Then, two-year yields exceeded 10-year yields by as much as 51 basis points.
To contact the reporters on this story:
Prashant Rao in London at [email protected];
Shamim Adam in Singapore at [email protected]
Treasuries Head for Weekly Advance on Signs Rates Won't Rise Much Further
Dec. 16 (Bloomberg) -- U.S. Treasuries are poised for the biggest weekly gain in five on speculation the Federal Reserve is nearing the end of interest-rate increases.
Treasuries have advanced since the central bank on Dec. 13 signaled in its monetary policy statement that interest rates are no longer stimulating economic growth. Signs inflation isn't accelerating pushed yields in the past two days to the lowest this month. The government yesterday said the annual rate of inflation in November was the slowest since July.
``The Fed's statement helped support expectations that interest rates don't need to rise significantly further,'' said Daniel Pfaendler, head of interest-rates strategy at Dresdner Kleinwort Wasserstein in Frankfurt. ``That is a good development for the long-end.''
The yield on the benchmark 10-year note was 4.45 percent as of 6:55 a.m. in New York, according to bond broker Cantor Fitzgerald LP. Bond yields move inversely to prices. The yield has dropped 8 basis points this week, the most since the week ended Nov. 11. A basis point is 0.01 percentage point.
The price of the 4 1/2 percent note due in November 2015 rose 3/32, or 94 cents per $1,000 face amount, to 100 13/32. The yield may fall a further 10 basis points by the end of the year, Pfaendler said.
The Labor Department yesterday said inflation slowed to an annual rate of 3.5 percent last month. The consumer price index fell 0.6 percent in November from a month earlier, the most since July 1949, after a 0.2 percent gain in October. Excluding food and energy, prices rose 0.2 percent, the same as the month before.
`Fewer Inflation Pressures'
``Interest rates don't look like they'll rise much further from here and with fewer inflation pressures, that's keeping Treasuries steady,'' said Satoshi Asai, who helps oversee $1 billion of bonds at Sompo Japan Asset Management in Tokyo, a unit of Sompo Japan Insurance Inc., the nation's third-largest casualty insurer. ``We are looking to buy on dips.''
The yield on the 10-year note may fall to 4.3 percent by the end of the year, Asai said.
Reports from the Fed's New York and Philadelphia branches showed indexes of prices paid for energy and raw materials dropped this month.
The Fed has raised the target for the overnight lending rate between banks 13 times since June 2004, to 4.25 percent from 1 percent. The rate is now the highest in more than four years. Policy makers next meet in January and March.
Yields on interest-rate futures show traders are pricing in a 90 percent chance of the Fed raising rates again to 4.5 percent on Jan. 31 and a 58 percent chance of another quarter-percentage point increase on March 28.
`Considerable Rally'
``Inflation remains steady. That's consistent with slower growth and the Fed stopping within the next one to two meetings,'' said Stuart Thomson, a fixed-income strategist at Charles Stanley Sutherlands in Edinburgh, Scotland. ``There'll be a considerable rally over the next few months.''
Thomson said the yield on the 10-year note could fall to 3.75 percent next year.
The central bank this week stopped saying there is ``accommodation'' in its policy, suggesting they're at or near a neutral rate that neither spurs nor restrains growth.
Gains in Treasuries may be tempered amid signs the economy is gaining strength. Treasury Secretary John Snow on Dec. 14 said the economy will grow by as much as 4 percent in 2006.
Improving Economy
The manufacturing indexes of the New York and Philadelphia Fed showed factories in the regions increased production this month. The two reports suggest that U.S. manufacturing will support economic growth this quarter as energy costs decline and rebuilding along the Gulf Coast, after Hurricanes Katrina and Rita, generates new factory orders.
``It's difficult to hold Treasuries with the macro-economic situation in the U.S. still improving,'' said Tadashi Tsukaguchi, who help oversees $4 billion of debt at Merrill Lynch Investment Management in Tokyo. ``We are planning to sell our Treasury holdings.''
The 10-year yield may rise to 4.7 percent by the end of February, Tsukaguchi said.
Economists surveyed by Bloomberg News between Nov. 30 and Dec. 8 boosted forecasts for gross domestic product in the current quarter and the first quarter of 2006.
The economy will expand 3.3 percent in the three months to Dec. 31 and quicken to 3.8 percent next quarters, according to the median estimate of 72 economists. In last month's survey, the forecast was for a 3 percent growth rate this quarter, and 3.6 percent in the next.
Yield Gap
The gap between two- and 10-year yields was 10 basis points today, near the narrowest since 2001. The shrinkage causes the yield curve, which charts the yields of bonds of different maturities, to flatten. That happens when yields on shorter- maturity securities rise and yields on longer-dated notes fall, or when both occur at the same time.
Ten-year yields haven't fallen below two-year yields, a phenomenon known as an inverted yield curve, since December 2000.
An inversion, where short-term yields exceed long-term rates, occurred prior to each of the past four U.S. recessions. The last time the curve was inverted was in 2000, before a recession that began in March 2001. Then, two-year yields exceeded 10-year yields by as much as 51 basis points.
To contact the reporters on this story:
Prashant Rao in London at [email protected];
Shamim Adam in Singapore at [email protected]
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