U.S. Treasuries Fall on View Two-Day Yield Drop Was Excessive
June 23 (Bloomberg) -- U.S. 10-year Treasury notes fell on speculation yesterday's drop in yields to a two-week low was excessive given expectations for economic growth and Federal Reserve interest-rate increases.
A government report today showed U.S. jobless claims dropped to the lowest in a month last week. Treasuries yesterday gained the most in almost seven months after the Bank of England said two policy makers voted for a rate cut, spurring speculation other central banks will also lower rates or curtail rate increases.
``We don't see much to shake our faith in the U.S. economy,'' said Moyeen Islam, a strategist in London at Barclays Capital, one of 22 dealers that trade directly with the Fed's New York branch. ``The economic picture is telling you yields are expensive, while the Fed is also still raising rates.''
The yield on the benchmark 10-year note rose 4 basis points, or 0.04 percentage point, to 3.98 percent by 8:48 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield dropped 17 basis points in the past two days. Bond yields move inversely to prices.
The price of the 4 1/8 percent note due in May 2015 dropped 5/16, or $3.13 per $1,000 face amount, to 101 5/32.
The Labor Department said 314,000 Americans filed first- time claims for unemployment benefits in the week ended June 18, down from a revised 334,000 the week before. A government report tomorrow may show orders for U.S. durable goods rose for a second month in May, the first back-to-back gain since December.
`Too Quick'
The U.S. central bank, which has raised the rate target by a quarter-point at each of its last eight meetings, is forecast to increase it by another 25 basis points next week, according to the median estimate of 69 economists surveyed by Bloomberg News. Policy makers will meet on June 29-30.
``Demand is still healthy and steady, and from the economic viewpoint, it is a conundrum that yields are so low,'' said Yoshitaka Majima, who oversees $4 billion of debt at Merrill Lynch Investment Management in Tokyo. ``The move in yields is too quick and unfounded.''
The spread between the 10-year note and the Fed's target rate narrowed to as low as 0.96 percentage point yesterday from a high of 2.04 percentage points in March. The last time the difference in yields was below 1 percentage point was in 2001, when the Fed was still cutting interest rates.
The Bank of England's statement yesterday was the first suggestion since 2003 that the U.K. central bank may lower borrowing costs. Sweden's Riksbank cut its benchmark rate more than expected two days ago, to a record low.
'Changing' Psychology
Yields around 4 percent are ``in a fair-value zone,'' said Paul McCulley, a managing director at Pacific Investment Management Co. yesterday. McCulley's colleague Bill Gross, manager of the world's biggest bond fund, said June 21 the Federal Reserve may lower interest rates early next year as the economy slows.
``There's been a hefty rally on anticipated fears that central bank psychology is changing, that they've probably tightened rates too far and now's the time to start easing,'' said Prashant Newnaha, a fixed-income strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``We're bullish on bonds.''
Yields may fall to 3.8 percent in the next two weeks, said Newnaha, who recommends investors buy Treasuries at yields around 4.05 percent.
Futures Bets
September Eurodollar futures have fallen 3 basis points to yield 3.78 percent, from 3.81 percent earlier in the week, showing traders are reducing expectations Fed policy makers will raise the overnight target lending rate between banks by more than half a percentage point this year.
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. The Fed's so-called federal funds rate is 3 percent.
Orders for durable goods -- items such as cars, machinery and computers made to last at least three years -- probably gained 1.5 percent in May, from 1.9 percent the month before, according to the median of 64 economists surveyed by Bloomberg.
Japan's services industry expanded for the first month in three in April as wage increases stoked consumer spending. Japan's manufacturers were also less pessimistic in the second quarter, a government survey showed today.
``The outlook for the world economy might not be as dire as some are starting to factor in to markets,'' said Nick Tribe at Portfolio Partners Ltd. in Melbourne, who manages the equivalent of $2.7 billion in bonds and cash.
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