U.S. 10-Year Note in Longest Drop Since March; Yield at 4.01%
June 10 (Bloomberg) -- U.S. 10-year Treasuries fell for the third day, the longest drop since March, on speculation yields near their lowest in 14 months don't reflect prospects for economic growth and Federal Reserve interest-rate increases.
Treasuries extended their declines today, pushing the 10- year yield above 4 percent for the first time this month, after the Commerce Department said the trade deficit in April widened as imports surged. The data may foster speculation that the economy is on what Fed Chairman Alan Greenspan yesterday called ``firm footing.''
``Bonds at these yield levels offer very little value,'' said Edgar Peters, chief investment officer at PanAgora Asset Management in Boston, which oversees $17 billion in stocks and bonds. ``Inflation is low but it's not that low to justify bond buying, especially given the U.S. economy is not slowing at a fast pace.''
The benchmark 4 1/8 percent note due May 2015 fell 7/16, or $4.38 per $1,000 face amount, to 100 15/16 at 10:55 a.m. in New York, according to Cantor Fitzgerald LP. The yield rose 6 basis points, or 0.06 percentage point, to 4.01 percent, the first time it is above 4 percent this month.
The yield is up from this week's low of 3.89 percent on June 8. The last time the yield increased for three days was in the period ended March 22. For the week, the yield is up 3 basis points, snapping a two-week rally. Yields on two-year notes are up 6 basis points to 3.68 percent, and have increased 12 basis points this week, the most since the period ended March 25.
Trade, Inflation
``Greenspan caused some people to temper some of their bullish views on Treasuries,'' said Steve Mansell, an interest- rate strategist at Banc of America Securities in London. ``The Fed is going to keep hiking rates at a measured pace which means at least another two more rate increases.''
The trade deficit widened to $57 billion from $53.6 billion. A deficit of $58 billion was expected, according to the median estimate of economist surveyed by Bloomberg News. Imports rose 4.1 percent, the biggest increase since November 2002, to a record $163.4 billion. Exports also were a record.
A Labor Department report showing import prices fell 1.3 percent in May, after rising at twice the expected pace in April, may have tempered declines in bonds. A drop of 0.4 percent in May was expected, according to the median estimate of 43 economists surveyed by Bloomberg.
Interest-Rate Futures
The yield on the September Eurodollar futures contract rose 9 basis points this week to 3.785 percent, suggesting traders expect the Fed will increase its target to at least 3.5 percent this year from 3 percent now. The futures settle at a three- month lending rate that has averaged 21 basis points more than the Fed's target the past 10 years.
The Fed has raised its rate target for overnight loans between banks by a quarter-point eight times since June 2004. Policy makers will raise the rate by another 25 basis points to when they next meet on June 29-30, according to the median forecast of 67 economists surveyed by Bloomberg.
``Most recent data support the view that the soft readings on the economy observed in the early spring were not presaging a more serious slowdown in the pace of activity,'' Greenspan told the Joint Economic Committee of Congress in Washington. ``The U.S. economy seems to be on a reasonably firm footing and underlying inflation remains contained.''
Bond Rally
Ten-year yields were below 4 percent for a ninth straight day, the longest stretch since March 2004. The inability of the yield to rise above 4 percent after Greenspan's testimony was seen as a bullish sign, some analysts said.
``There are quite a lot of global factors that will probably keep yields from pushing higher,'' said Bulent Baygun, head of fixed-income strategy at Barclays Capital Inc.
The European Central Bank last week cut its 2005 growth estimate for the third time in six months. It forecast expansion of about 1.4 percent. The Organization for Economic Cooperation and Development predicts the U.S. economy to grow 3.6 percent.
Ten-year yields have dropped this month to the lowest in 14 months as evidence of a slowdown in the economy prompted some traders to bet the Fed may be approaching the end of a series of interest-rate increases.
Trading patterns suggest the yield may fall to about 3.89 percent, debt strategists at Credit Suisse First Boston said in a report to clients today.
Inflation Forecast
``The next 25-basis-point move in yields is to the upside,'' said Michael Mullaney, who manages $10 billion in stocks and bonds at Fiduciary Trust Co. in Boston. ``Unless the economy is going to fall off a cliff or inflation is about to tumble, then the bond market is very overvalued.''
Consumer prices will rise an estimated 2.9 percent in the April-June period from a year earlier, compared with a previous forecast of 2.8 percent, according the median estimate in a Bloomberg survey. A 2.8 percent forecast for all of 2005 compares with a 2.3 percent rate expected in January. Prices last year rose 3.3 percent, the most since 2000.
Economists still expect yields to rise in coming weeks, according to a Bloomberg survey. The yield may rise to 4.2 percent by the end of the month, according to 61 economists surveyed between May 31 and June 8.
The New York branch of the Fed said yesterday its holdings of Treasury and agency debt for foreign central banks and international accounts rose by $5.340 billion to a total of $1.432 trillion in the week that ended June 8. It held a daily average of $1.089 trillion of Treasuries, an increase of $3.837 billion from the previous week.
