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Treasuries May Drop on View Philadelphia Fed Index Increased
June 16 (Bloomberg) -- U.S. 10-year Treasury notes may fall for the sixth day in seven on speculation a report today from the Federal Reserve's Philadelphia branch will add to evidence manufacturing is accelerating.
The slump in debt prices pushed 10-year yields to a four- week high yesterday as investors bet that prices fail to reflect the prospect of more interest-rate increases by the Fed. The Philadelphia Fed may say an index of manufacturing in its region rose from the lowest since mid-2003. The New York Fed yesterday reported a bigger-than-forecast gain in a similar index.
``We're headed higher'' in terms of yield, said Jay Mueller, who oversees about $4 billion in debt as senior portfolio manager at Wells Capital Management in Menomonee Falls, Wisconsin. A yield of 4.5 percent to 5 percent ``is a reasonable value for the 10-year'' note given current levels of inflation and growth, he said.
The benchmark 10-year Treasury yielded 4.11 percent at 8:50 a.m. in New York. It reached 4.15 percent yesterday, the highest since May 17, and is up from a 14-month low of 3.80 percent on June 3. The 4 1/8 percent note due May 2015 was little changed in price at 100 1/8, according to bond broker Cantor Fitzgerald LP.
This week's rise in the yield above 4.10 percent sets the stage for a push to 4.30 percent, about the bottom of the yield's range in April and May, according to Credit Suisse First Boston debt strategists. Barclays Capital's strategists said in a report today that they are ``neutral on rates for the next few weeks,'' with the yield likely holding in a range of 4 percent to 4.20 percent.
Futures Contracts
Futures contracts indicate traders expect the Fed to raise its benchmark overnight lending rate between banks to 3.25 percent this month and to 3.50 percent in August, from 3 percent now.
``Momentum is for higher yields,'' Jason Simpson, a bond strategist at ABN Amro Holding NV in London, said. ``We've never subscribed to the view that the U.S. economy was slowing to any kind of danger level, or that the Fed would stop hiking rates soon.'' Ten-year yields may reach 4.25 percent in three months, Simpson said.
The Philadelphia Fed's manufacturing index probably rose to 10 in June from 7.3 last month, based on the median estimate of 52 economists surveyed by Bloomberg News. The index is released at noon, New York time, A Fed report yesterday showed new York area manufacturing recovered from a two-year low in May.
The Labor Department said the number of Americans filing for first-time weekly jobless claims rose to 333,000 from 332,000. Housing starts climbed to a 2.009 million unit annual rate from 2.005 million in April, according to the Commerce Department. A reading of 2.05 million units was expected, based on the median estimate of 63 economists.
``The data are showing we should be a bit more confident about the strength of growth in the U.S.,'' said Stephen Miller, who helps oversee the equivalent of $1.5 billion of cash and bonds at Merrill Lynch Investment Managers in Sydney. ``We are bearish on Treasuries.''
Any decline in Treasuries may be tempered by speculation the higher yields of U.S. debt compared with European and Japanese government bonds will attract foreign buyers.
Relative Value
``The yield advantage you get compared to most of the rest of the world is very significant,'' said Grant Hassell, who helps manage about $2.2 billion of fixed-income securities at AMP Capital in Wellington. ``You are getting a 70 to 80 basis points pickup out of Europe and that is attracting buying into Treasuries out of Europe and Japan.''
German 10-year bunds currently yield 3.32 percent, giving holders of U.S. 10-year debt an additional 78 basis points of yield. The spread compares with an average 48 basis points over the last 12 months.
Foreign investors purchased a net $47.4 billion in Treasuries, corporate bonds, stocks and other financial assets, up from $40.6 billion in March, the Treasury Department said yesterday in Washington.
The Fed has raised its interest-rate target eight times since June of 2004, from an almost 46-year low of 1 percent. The policy-making Federal Open Market Committee next meets on June 29 and June 30, and then four more times this year.
`Hard to Justify'
``The levels of yields last week was hard to justify given what the Fed has done and will clearly have to do over the next few months,'' said Peter Munckton, a debt market strategist at Commonwealth Bank of Australia in Sydney. He said yields may rise to 4.2 percent over the next week.
September Eurodollar futures yielded 3.81 percent, up from 3.68 percent on June 1, showing traders have raised their bets on how much the Fed will lift its target rate in the next few months. The futures settle at a three-month lending rate that has averaged 21 basis points more than the Fed's target over the past 10 years.
Further Fed rate increases may mean the so-called U.S. yield curve becomes inverted this year, said Steven Major, head of fixed-income strategy in London at HSBC Holdings Plc, Europe's biggest bank by market value.
A yield curve is a chart consisting of the yields of bonds of the same quality but different maturities. An inverted curve occurs when shorter-dated securities yield more than longer- dated notes. Two-year notes are typically more sensitive to changes in monetary policy while 10-year and longer-maturity debt is more sensitive to variations in inflation.
``You could have the 10-year yield around 4 percent and the two-years above that,'' Major said. The Fed will probably lift its rate target to 3.75 percent by the end of September, he said.
June 16 (Bloomberg) -- U.S. 10-year Treasury notes may fall for the sixth day in seven on speculation a report today from the Federal Reserve's Philadelphia branch will add to evidence manufacturing is accelerating.
The slump in debt prices pushed 10-year yields to a four- week high yesterday as investors bet that prices fail to reflect the prospect of more interest-rate increases by the Fed. The Philadelphia Fed may say an index of manufacturing in its region rose from the lowest since mid-2003. The New York Fed yesterday reported a bigger-than-forecast gain in a similar index.
``We're headed higher'' in terms of yield, said Jay Mueller, who oversees about $4 billion in debt as senior portfolio manager at Wells Capital Management in Menomonee Falls, Wisconsin. A yield of 4.5 percent to 5 percent ``is a reasonable value for the 10-year'' note given current levels of inflation and growth, he said.
The benchmark 10-year Treasury yielded 4.11 percent at 8:50 a.m. in New York. It reached 4.15 percent yesterday, the highest since May 17, and is up from a 14-month low of 3.80 percent on June 3. The 4 1/8 percent note due May 2015 was little changed in price at 100 1/8, according to bond broker Cantor Fitzgerald LP.
This week's rise in the yield above 4.10 percent sets the stage for a push to 4.30 percent, about the bottom of the yield's range in April and May, according to Credit Suisse First Boston debt strategists. Barclays Capital's strategists said in a report today that they are ``neutral on rates for the next few weeks,'' with the yield likely holding in a range of 4 percent to 4.20 percent.
Futures Contracts
Futures contracts indicate traders expect the Fed to raise its benchmark overnight lending rate between banks to 3.25 percent this month and to 3.50 percent in August, from 3 percent now.
``Momentum is for higher yields,'' Jason Simpson, a bond strategist at ABN Amro Holding NV in London, said. ``We've never subscribed to the view that the U.S. economy was slowing to any kind of danger level, or that the Fed would stop hiking rates soon.'' Ten-year yields may reach 4.25 percent in three months, Simpson said.
The Philadelphia Fed's manufacturing index probably rose to 10 in June from 7.3 last month, based on the median estimate of 52 economists surveyed by Bloomberg News. The index is released at noon, New York time, A Fed report yesterday showed new York area manufacturing recovered from a two-year low in May.
The Labor Department said the number of Americans filing for first-time weekly jobless claims rose to 333,000 from 332,000. Housing starts climbed to a 2.009 million unit annual rate from 2.005 million in April, according to the Commerce Department. A reading of 2.05 million units was expected, based on the median estimate of 63 economists.
``The data are showing we should be a bit more confident about the strength of growth in the U.S.,'' said Stephen Miller, who helps oversee the equivalent of $1.5 billion of cash and bonds at Merrill Lynch Investment Managers in Sydney. ``We are bearish on Treasuries.''
Any decline in Treasuries may be tempered by speculation the higher yields of U.S. debt compared with European and Japanese government bonds will attract foreign buyers.
Relative Value
``The yield advantage you get compared to most of the rest of the world is very significant,'' said Grant Hassell, who helps manage about $2.2 billion of fixed-income securities at AMP Capital in Wellington. ``You are getting a 70 to 80 basis points pickup out of Europe and that is attracting buying into Treasuries out of Europe and Japan.''
German 10-year bunds currently yield 3.32 percent, giving holders of U.S. 10-year debt an additional 78 basis points of yield. The spread compares with an average 48 basis points over the last 12 months.
Foreign investors purchased a net $47.4 billion in Treasuries, corporate bonds, stocks and other financial assets, up from $40.6 billion in March, the Treasury Department said yesterday in Washington.
The Fed has raised its interest-rate target eight times since June of 2004, from an almost 46-year low of 1 percent. The policy-making Federal Open Market Committee next meets on June 29 and June 30, and then four more times this year.
`Hard to Justify'
``The levels of yields last week was hard to justify given what the Fed has done and will clearly have to do over the next few months,'' said Peter Munckton, a debt market strategist at Commonwealth Bank of Australia in Sydney. He said yields may rise to 4.2 percent over the next week.
September Eurodollar futures yielded 3.81 percent, up from 3.68 percent on June 1, showing traders have raised their bets on how much the Fed will lift its target rate in the next few months. The futures settle at a three-month lending rate that has averaged 21 basis points more than the Fed's target over the past 10 years.
Further Fed rate increases may mean the so-called U.S. yield curve becomes inverted this year, said Steven Major, head of fixed-income strategy in London at HSBC Holdings Plc, Europe's biggest bank by market value.
A yield curve is a chart consisting of the yields of bonds of the same quality but different maturities. An inverted curve occurs when shorter-dated securities yield more than longer- dated notes. Two-year notes are typically more sensitive to changes in monetary policy while 10-year and longer-maturity debt is more sensitive to variations in inflation.
``You could have the 10-year yield around 4 percent and the two-years above that,'' Major said. The Fed will probably lift its rate target to 3.75 percent by the end of September, he said.
