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Treasuries Little Changed as Growth Revised Lower, Claims Rise
By Deborah Finestone and Michael McDonald
Dec. 21 (Bloomberg) -- Treasuries were little changed, with yields near one-month highs, after government reports showed economic growth was revised lower in the third quarter and weekly applications for unemployment benefits increased.
The reports failed to add to expectations that slower growth will prompt the Federal Reserve to reduce its target rate for overnight loans in the first quarter of next year. Evidence of a slowdown has propelled Treasuries to their best year since 2002.
``The bond market is going through fits and starts,'' said Kevin Giddis, head of fixed-income trading at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee. ``Every time it figures out the economy is slowing and inflation is under control a number comes out and jams it.'''
The yield on the benchmark 10-year bond fell about 1 basis point, or 0.01 percentage point, to 4.59 percent at 9:07 a.m. in New York, according to New York-based broker Cantor Fitzgerald LP. The price of the 4 5/8 percent note due in November 2016 rose 2/32, or 63 cents per $1,000 face value, to 100 9/32.
Government securities returned about 3.9 percent in 2006, according to Merrill Lynch & Co. data, as some investors prepared for the Federal Reserve to cut interest rates in 2007.
Economic growth in the U.S. cooled to the slowest pace this year in the third quarter, dragged down by the biggest decline in home building in 15 years.
Gross domestic product, the value of all goods and services produced, expanded at a 2.0 percent annual rate, less than the 2.2 percent estimated last month and down from 2.6 percent for the second quarter, the Commerce Department said today.
Weekly Claims
First-time applications for state unemployment benefits in the U.S. rose last week while staying at a level that points to strength in the labor market.
Initial jobless claims rose 9,000 to 315,000 in the week that ended Dec. 16 from 306,000 the prior week, the Labor Department said. The four-week moving average, a less volatile measure, fell to 325,750 from 327,750.
The Fed Bank of Philadelphia is expected to say at 12 p.m. today say its index of manufacturing fell to 4 in December from 5.1 in November, a separate survey showed. Readings below zero signal a contraction.
``I remain bullish'' on Treasuries because of the slide in home prices, said Adam MacKillop, a U.S. fixed-income trader at Barclays Capital Japan Ltd. in Tokyo. ``As U.S. consumers see their major asset deteriorate, they aren't going to be as willing to spend.''
Preferred Measure
The best value is in one- to two-year Treasuries, which stand to gain most as the Fed cuts interest rates next year, MacKillop said. The central bank may reduce borrowing costs as many as five times in 2007, he said.
Demand for Treasuries may also be spurred on speculation inflation may be slowing in the world's largest economy.
The Fed's preferred gauge of inflation, due for release Dec. 22, will slow to an annual 2.3 percent in November, compared with 2.4 percent in October, a Bloomberg survey of economists shows.
Gains for Treasuries may be limited before reports tomorrow expected to show personal spending and durable goods orders rose last month.
Personal spending increased 0.6 percent, three times the October gain, according to a Bloomberg survey of economists ahead of a Commerce Department report. The report is also forecast to show incomes climbed 0.4 percent for a second month.
Durable Goods
Durable goods orders last month probably rose 1.3 percent after falling 8.3 percent in October, a separate survey showed.
Yields have risen this month as traders reduced bets the Fed will cut interest rates next quarter to keep the economy from slumping. Interest-rate futures indicate there is about a 14 percent chance the central bank will reduce U.S. rates by April, down from almost 80 percent two weeks ago.
``We don't think the economy is going to show sufficient weakness to persuade the Fed to overcome its fears over inflation,'' said Stuart Thomson, a bond fund manager at Resolution Investment Management in Glasgow, Scotland. ``Yields will rise as the market adjusts to the possibility the Fed won't cut rates in the first quarter.''
The Treasury Department will today say how much it plans to auction in two- and five-year debt next week.
The government may sell $20 billion of two-year notes on Dec. 27 and $14 billion of five-year securities the following day, according to Wrightson ICAP, a Jersey City, New Jersey-based research firm specializing in government finance.
By Deborah Finestone and Michael McDonald
Dec. 21 (Bloomberg) -- Treasuries were little changed, with yields near one-month highs, after government reports showed economic growth was revised lower in the third quarter and weekly applications for unemployment benefits increased.
The reports failed to add to expectations that slower growth will prompt the Federal Reserve to reduce its target rate for overnight loans in the first quarter of next year. Evidence of a slowdown has propelled Treasuries to their best year since 2002.
``The bond market is going through fits and starts,'' said Kevin Giddis, head of fixed-income trading at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee. ``Every time it figures out the economy is slowing and inflation is under control a number comes out and jams it.'''
The yield on the benchmark 10-year bond fell about 1 basis point, or 0.01 percentage point, to 4.59 percent at 9:07 a.m. in New York, according to New York-based broker Cantor Fitzgerald LP. The price of the 4 5/8 percent note due in November 2016 rose 2/32, or 63 cents per $1,000 face value, to 100 9/32.
Government securities returned about 3.9 percent in 2006, according to Merrill Lynch & Co. data, as some investors prepared for the Federal Reserve to cut interest rates in 2007.
Economic growth in the U.S. cooled to the slowest pace this year in the third quarter, dragged down by the biggest decline in home building in 15 years.
Gross domestic product, the value of all goods and services produced, expanded at a 2.0 percent annual rate, less than the 2.2 percent estimated last month and down from 2.6 percent for the second quarter, the Commerce Department said today.
Weekly Claims
First-time applications for state unemployment benefits in the U.S. rose last week while staying at a level that points to strength in the labor market.
Initial jobless claims rose 9,000 to 315,000 in the week that ended Dec. 16 from 306,000 the prior week, the Labor Department said. The four-week moving average, a less volatile measure, fell to 325,750 from 327,750.
The Fed Bank of Philadelphia is expected to say at 12 p.m. today say its index of manufacturing fell to 4 in December from 5.1 in November, a separate survey showed. Readings below zero signal a contraction.
``I remain bullish'' on Treasuries because of the slide in home prices, said Adam MacKillop, a U.S. fixed-income trader at Barclays Capital Japan Ltd. in Tokyo. ``As U.S. consumers see their major asset deteriorate, they aren't going to be as willing to spend.''
Preferred Measure
The best value is in one- to two-year Treasuries, which stand to gain most as the Fed cuts interest rates next year, MacKillop said. The central bank may reduce borrowing costs as many as five times in 2007, he said.
Demand for Treasuries may also be spurred on speculation inflation may be slowing in the world's largest economy.
The Fed's preferred gauge of inflation, due for release Dec. 22, will slow to an annual 2.3 percent in November, compared with 2.4 percent in October, a Bloomberg survey of economists shows.
Gains for Treasuries may be limited before reports tomorrow expected to show personal spending and durable goods orders rose last month.
Personal spending increased 0.6 percent, three times the October gain, according to a Bloomberg survey of economists ahead of a Commerce Department report. The report is also forecast to show incomes climbed 0.4 percent for a second month.
Durable Goods
Durable goods orders last month probably rose 1.3 percent after falling 8.3 percent in October, a separate survey showed.
Yields have risen this month as traders reduced bets the Fed will cut interest rates next quarter to keep the economy from slumping. Interest-rate futures indicate there is about a 14 percent chance the central bank will reduce U.S. rates by April, down from almost 80 percent two weeks ago.
``We don't think the economy is going to show sufficient weakness to persuade the Fed to overcome its fears over inflation,'' said Stuart Thomson, a bond fund manager at Resolution Investment Management in Glasgow, Scotland. ``Yields will rise as the market adjusts to the possibility the Fed won't cut rates in the first quarter.''
The Treasury Department will today say how much it plans to auction in two- and five-year debt next week.
The government may sell $20 billion of two-year notes on Dec. 27 and $14 billion of five-year securities the following day, according to Wrightson ICAP, a Jersey City, New Jersey-based research firm specializing in government finance.
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