U.S. 10-Year Yield Is Close to One-Week High on Rate Outlook
June 29 (Bloomberg) -- U.S. 10-year Treasury yields held close to a one-week high on expectations the government will today lift its estimate of first-quarter growth, backing expectations for further Federal Reserve interest rate increases.
The first-quarter growth report may limit a three-month rally in 10-year Treasuries, which are set for their biggest quarterly gain since 2002. Fed policy makers are forecast to raise interest rates a ninth straight time tomorrow to ensure that eight consecutive quarters of growth exceeding 3 percent, the longest stretch in almost two decades, don't fuel inflation.
``If we do start to see an improvement in U.S. economic data, yields at these levels will become a major problem,'' said Jon Lee, a fixed-income strategist in London at Barclays Capital. ``The Fed at the moment has no real reason to pause, and we see them going to 4 percent by the end of the year.''
The benchmark 10-year note yield rose 1 basis point, or 0.01 percentage point, to 3.98 percent at 7:22 a.m. in New York, according to bond broker Cantor Fitzgerald LP. Bond yields move inversely to prices. The yield last exceeded 4 percent on June 22.
The price of the 4 1/8 percent note maturing in May 2015 rose 1/32, or 31 cents per $1,000 face amount, to 101 3/16.
The Commerce Department is likely to report the economy in grew 3.7 percent, higher than the 3.5 percent rate estimated last month, according to the median estimate of 71 economists. The report is scheduled for release at 8:30 a.m. in Washington.
`More Hawkish'
``The risk going into the meeting is the Fed coming out a little bit more hawkish than the market has been building in over the past month or two,'' said Grant Hassell, who helps manage about $2.2 billion of fixed-income securities at AMP Capital in Wellington. ``I don't think they will say they have done enough. I'm still negative on the Treasury market.''
Treasuries have returned 3.5 percent since the end of March, including reinvested interest, compared with a 0.4 percent loss last quarter, according to Merrill Lynch & Co.'s Treasury Master index. The performance is the best since they returned 7.23 percent in the three months ended Sept. 30, 2002.
A private report yesterday showing a larger-than-expected increase in consumer confidence in June to the highest in three years helped damp speculation the Fed is almost done raising borrowing costs.
Gary Stern, president of the Minneapolis Fed, said in a June 20 interview that ``there's no reason to stop tightening credit.'' A day later, Jeffrey Lacker, president of the Richmond Fed, said it's ``too soon to say when we are going to stop.''
Rate Forecast
The central bank is forecast to raise its target for overnight bank lending by a quarter percentage point to 3.25 percent, according to all but one of the 88 economists surveyed by Bloomberg News.
Yields on September Eurodollar futures contracts have risen 3.5 basis points to 3.81 percent this week, showing traders are boosting expectations the Fed will raise its target rate by more than half a percentage point this year.
The futures settle at a three-month lending rate that has averaged about 21 basis points more than the Fed's target over the past 10 years.
Declines in Treasuries may be tempered by expectations a report in two days will show U.S. manufacturing growth probably held at a two-year low in June as higher inventories curbed capital spending on equipment.
The Institute for Supply Management may say its factory index was unchanged at 51.4 in June, according to the median estimate of 72 economists surveyed by Bloomberg.
``Growth and spending have been weak on the corporate side and we expect the ISM numbers to reflect that,'' said Takashi Yamamoto, a Treasury trader in Singapore at Mitsubishi Trust & Banking Corp., a unit of Japan's second-largest lender by assets. ``That will be supportive for U.S. Treasuries.''
Extend Decline
Yamamoto said he may buy 10-year Treasuries at yields around 4 percent.
Treasuries may extend yesterday's decline, the biggest in more than two weeks, as oil prices slid from near-record levels.
U.S. stocks had their biggest rally in five weeks yesterday as oil fell 3.9 percent, dropping below $60 a barrel. Crude oil touched a record $60.95 a barrel on June 27 and traded at $58.16 today.
The Treasury will sell $20 billion of two-year notes today, $2 billion less than last month's sale and the smallest since October 2001, when the government auctioned $19 billion.
The notes yielded 3.65 percent in pre-auction trading. At the last two-year auction on May 25, there were $2.36 worth of bids for every $1 sold, the most since November.
