Treasury Two-Year Notes Fall Amid Speculation on Fed Policy
Share | Email |
Print |
A A A
By Cordell Eddings and Anchalee Worrachate
Oct. 23 (Bloomberg) -- Treasury two-year note
yields rose above 1 percent for the first time this month as investors speculated the Federal Reserve may begin to signal a change in monetary policy.
The
yield on the two-year security, most sensitive to interest rates, gained the most in two weeks after Federal Reserve Bank of Philadelphia President
Charles Plosser yesterday told Bloomberg Radio his “instinct is the time for raising rates will be before many of my colleagues” think it is.
“Speculation on a change in the Fed’s policy and if they will raise rates sooner is weighing on the front end,” said
Christian Cooper, an interest-rate strategist at RBC Capital Markets in New York, one of 18 primary dealers that trade with the central bank. “The Fed is still nowhere near raising rates, though. The Fed was very creative when adding liquidity to the market and they will be just as creative drawing out the liquidity.”
The
yield on the two-year note rose six basis points to 1 percent at 10:14 a.m. in New York, according to BGCantor Market Data. The yield, which last touched above 1 percent on Sept. 30, rose as much as eight basis points, the biggest intraday rise since it gained 10 basis points on Oct. 9. The 1 percent security maturing in September 2011 fell 4/32, or $1.25 per $1,000 face amount, to 100. The yield has gained five basis points this week.
The 10-year
note yield rose five basis points to 3.47 percent. It has gained three basis points for the week.
‘Extended Period’
At their most recent meeting, on Sept. 23, members of the Fed’s policy-making Open Market Committee kept the benchmark rate in a range of zero to 0.25 percent. In a statement, they said economic conditions will warrant keeping the rate low “for an extended period.”
Futures on the Chicago Board of Trade show a 58 percent chance the Fed will boost its target rate for overnight lending between banks by April, compared with 55 percent yesterday. The Fed cut its benchmark rate to a range of zero to 0.25 percent at the end of 2008.
“The speculation about the rate change is not new, just more of the same,” said
Ray Remy, head of fixed income in New York at primary dealer Daiwa Securities America Inc. “Concerns about next week’s supply will take over today as we still have to cheapen up going into big supply.”
‘Risk-Taking Sentiment’
The U.S. announced yesterday plans to sell a record $123 billion of notes and inflation-protected debt next week, made up of $7 billion in five-year TIPS on Oct. 26, $44 billion of two- year notes on Oct. 27, $41 billion of five-year notes on Oct. 28 and $31 billion of seven-year securities on Oct. 29.
Treasuries handed investors a 0.4 percent loss this month, while U.S. corporate bonds gained 0.5 percent, according to indexes compiled by Merrill Lynch & Co., as investors sought higher-yielding assets.
For the year, government bonds fell 2.8 percent, while company bonds gained 24 percent, the Merrill indexes show. The
MSCI World Index returned 27 percent.
Demand for higher-yielding assets sent the yen to a two- month low against the euro.
“Risk-taking sentiment is firm amid signs economies around the world are recovering,” said
Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank.
Japan’s currency weakened to as low as 138.23 per euro, a level not seen since Aug. 10, from 137.24 in New York yesterday.
Home Sales
Sales of existing U.S. homes climbed in September to the highest level in more than two years as homebuyers rushed to take advantage of a tax credit before it runs out.
Purchases jumped 9.4 percent to a 5.57 million annual rate, more than forecast and following a 5.09 rate in August, the National Association of Realtors said today.
The increase may suggest the industry is stabilizing after its collapse triggered the global financial crisis. The 2007 slump in U.S. property froze bond markets last year and led to $1.66 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg.
Fed efforts to cap consumer borrowing costs brought down U.S. 30-year fixed mortgage
rates to 5.15 percent yesterday from this year’s high of 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida.
The Fed and the U.S. government have spent, lent or guaranteed $11.6 trillion to spur the world’s biggest economy, raising speculation the stimulus will lead to faster inflation.
Investors have driven the difference between 2- and 10- year yields to 2.48 percentage points, widening the gap for a fourth week. The figure compares to an average
spread of 88 basis points over the past five years.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, widened to 2 percentage points from 1.82 percentage points a month ago. The five-year average is 2.18 percentage points.