U.S. 10-Year Treasuries Fall as Fed's Stern Signals Higher Rate
June 20 (Bloomberg) -- U.S. 10-year Treasury notes fell, extending a two-week slide, as Federal Reserve Bank of Minneapolis President Gary Stern added to expectations for further interest-rate increases.
Stern said there's ``no reason'' for the Fed to stop raising interest rates, in an interview with Japan's Nihon Keizai newspaper published today. Treasuries extended declines after Reuters reported that the European Central Bank is considering cutting its benchmark interest rate, boosting demand for European bonds relative to U.S. government debt.
``Stern is having a much bigger impact,'' said Gary Pollack, head of fixed-income trading at Deutsche Bank AG's investment management unit in New York, with $12 billion in assets. ``We are seeing investors adjusting to the fact there's still going to be a couple of rate increases down the road and that a 10-year note around 4.10 percent is not appropriate.''
The yield on the benchmark 10-year Treasury note rose 6 basis points, or 0.06 percentage point, to 4.13 percent at 10:05 a.m. in New York, according to bond broker Cantor Fitzgerald LP. Bond yields move inversely to prices. Pollack said the 10-year yield is headed to ``fair value'' of 4.25 percent.
The price of the 4 1/8 percent note due in May 2015 fell 1/2, or $5 per $1,000 face amount, to 100 1/32.
``The market has become more negative,'' said Hiroyuki Yamada, who helps oversee about $1.3 billion at Daiwa SB Investments Ltd. in Tokyo, a unit of Japan's second-largest brokerage. ``The Treasury yield is rising, and this trend is likely to continue.'' Yamada said the yield may rise to 4.5 percent by year-end.
Economic Indicators
An industry report today showed an index of leading U.S. economic indicators fell 0.5 percent in May. The April figure was revised higher to zero from a previously reported drop of 0.2 percent, the Conference Board reported in New York.
Treasuries also dropped after the U.S. Commodity Futures Trading Commission said late June 17 that hedge fund managers and other large speculators increased bets on a drop in prices in the week ended June 14.
A survey of 47 international institutional money managers controlling $1.287 trillion conducted by Ried, Thunberg & Co. showed investors turned bearish last week and expect 10-year notes to fall in the near term. The reading for the note's price for year-end was 45 from 43 a week ago. A level below 50 shows expectations for a decline.
Ten-year yields slid to 3.8 percent on June 3, the lowest since March 2004. Yields rose in the following two weeks because of concern they had declined too much given forecasts for Fed rate increases. A third weekly gain in yields would be the longest run this year.
Oil Surge
An increase in oil prices may also be hurting government bonds, according to investors such as Andrew Harding, who manages about $7 billion as director of taxable fixed-income at National City Investment Management in Cleveland.
Crude oil jumped to a record above $59 a barrel in New York as soaring demand in Asia and North America stretched the ability of OPEC and refiners to keep pace.
``Higher oil prices may bring more inflation pressure to the economy and in turn, that is not very positive for bonds,'' he said. Oil prices are rising because demand is outstripping supply, Harding said.
ECB Rate
Demand for European bonds rose after Reuters reported ECB policy makers are waiting for new economic data before deciding whether lowering interest rates would be justified. The wire service cited unidentified sources.
The difference in yield between two-year Treasuries and German bunds widened 7 basis points today to 1.59 percentage point. The ECB's benchmark lending rate is 2 percent, compared with the Fed's 3 percent target rate.
Fed Chairman Alan Greenspan, in his testimony to Congress on June 9, said the central bank may keep to its ``measured'' stance of interest-rate increases.
Policy makers have raised their target interest rate eight times since June 2004 from an almost 46-year low of 1 percent. They will increase the rate by another 25 basis points when they meet on June 29 and June 30, according to all but two of the 68 economists surveyed by Bloomberg.
Speculative short positions, or bets prices will fall, outnumbered long positions by 30,553 contracts on the Chicago Board of Trade, according to data released on June 17. There were more bets on an increase in prices the week before last.
Stern Comments
``Right now there's no reason to stop tightening credit,'' Stern told the Nihon Keizai paper. He said ``it would be appropriate to raise at a measured pace,'' according to the newspaper. Stern said the U.S. economy would probably be able to continue expanding at an annualized rate of between 3 percent and 4 percent, the report said. Stern votes on monetary policy this year.
Stern echoed Kansas City Fed President Thomas Hoenig, who on June 16 said that economists estimate a ``neutral'' level for the Fed's target may be as high as 4.5 percent. Hoenig does not vote on policy this year.
Treasuries also fell today as companies including New York- based insurer MetLife Inc. announced plans to sell at least $4 billion of debt.
Companies that are issuing debt sometimes sell Treasuries in advance as a hedge against a rise in yields that would increase their borrowing costs. In the event that yields rise, the Treasuries that were sold can be bought back at a lower price, producing a gain.
Traders this month raised their bets on how much the Fed will increase its target rate over the next few months. September Eurodollar futures yielded 3.795 percent, up from 3.68 percent on June 1. 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.
