Treasuries Fall on Week as Traders Bet Rate Rise Is Approaching
Nov. 29 (Bloomberg) -- U.S. Treasuries fell this week, sending the yield on the benchmark two-year note to its biggest weekly increase in four months, after better-than-expected reports on the labor market and manufacturing indicated the Federal Reserve may raise interest rates sooner than predicted.
A drop in demand for the two-year note, which most closely tracks monetary-policy expectations, boosted the gap between the security's yield and the Fed's 1 percent overnight lending target to 1.05 percentage points, the widest since July 2002. Yields climbed even as policy makers said there was enough slack in the economy to leave interest rates at a four-decade low.
``The economy is getting better, and people are bearish on Treasuries,'' said Andrew Palmer, who manages $2 billion in debt at ASB Capital Management in Washington. ``The market perceives the Fed as moving closer to raising rates.''
This week, the yield on the benchmark two-year note rose 23 basis points, the most since the week ended Aug. 1, to close at 2.05 percent. On a closing basis, the yield was the highest since Dec. 2, 2002. The yield rose as high as 2.06 percent in intraday trading Friday, the highest since Nov. 7.
The yield on the 10-year note -- a 4 1/4 percent Treasury note due November 2013 -- gained 17 basis points, the most since the five days ended Oct. 3. For the month, the yield on the two- year note rose 37 basis points; the 10-year note yield climbed 15 basis points.
Below Average
Trading was below average yesterday, analysts said, with many firms relying on reduced staffing to trade bonds on the day after the Thanksgiving holiday in the U.S. The Bond Market Association, a trade group, recommended that markets close early at 2 p.m. New York time.
Treasuries fell this week after reports showed orders for durable goods rose 3.3 percent in October, the most in 15 months, and weekly jobless claims fell to the lowest in three years. An index of Chicago-area manufacturing jumped to 64.1 in November from 55 the previous month, the highest since February 1995. The Commerce Department on Tuesday said the economy grew at an 8.2 percent rate in the third quarter, the fastest in almost two decades.
Some Fed officials have suggested that they have room to leave the target for overnight bank loans at a four-decade low for at least several more months. Robert Parry, president of the Fed's San Francisco branch, this week said the economy can expand for ``more than a few quarters'' without sparking inflation. Policy makers next meet on Dec. 9.
`Robust' Economy
``The Fed is saying that it's not going to raise rates, but the market doesn't believe it because the data have been so robust,'' said James Caron, a fixed-income strategist at Merrill Lynch & Co. in New York, one of the 22 primary U.S. government securities dealers that trade with the Fed's New York branch.
Caron said the yield on the 10-year note would trade between 4.1 percent and 4.5 percent in coming months.
Even with the signs of an accelerating economy, inflation remains subdued. The personal consumption expenditures price index, a measure of inflation included in Tuesday's gross domestic product report, rose at a 2.3 percent annual pace, originally reported as a 2.4 percent gain. The index is a measure of inflation watched by Fed Chairman Alan Greenspan.
``Greenspan has been suggesting that the accommodation will continue for some time,'' said Tim Sullivan, who helps oversee $15.5 billion in bonds at HSBC Investment Management in a televised interview. ``Why? Because the output gap is still enormous, and there isn't any threat of inflation -- there's no semblance of it on the horizon.''
Interest-Rate Futures
Still, interest-rate futures traders drove the yield on the June Eurodollar futures contract, a gauge of three-month lending rates, up 3.5 basis points yesterday to 1.745 percent. The contract's yield is 19 basis points higher on the week. On average, three-month lending rates have been 24 basis points more than the Fed's target rate during the past 10 years.
Foreign central bank holdings of Treasury and agency securities in accounts at the Fed rose by a daily average of $14.4 billion in the week ended Wednesday to a record $1.03 trillion. Foreign holdings of Treasury securities totaled $818.8 billion. Holdings of agency securities totaled $209.7 billion.
Diane Swonk, chief economist at Bank Once Corp. in Chicago, said this week the Fed may raise its target by 50 basis points, to 1.5 percent, by June because of the accelerating economy.
More signs of growth may come next week. The Institute for Supply Management on Monday will probably say its factory index rose for a fifth month in six to 58.1, from 57 in October, according to the median forecast of 55 economists surveyed by Bloomberg News. On Friday, the Labor Department may say the economy added 150,000 jobs in November, a separate survey found, making it the fourth consecutive increase.
Lehman Index
``The bond market is preparing itself for the Fed to remove its reference to keeping rates low for a `considerable period,''' said David Brownlee, who helps manage $7 billion at N.L. Capital Management in Montpelier, Vermont. Policy makers ``will err on the side of being overly accommodative, but the bond market will be way ahead of it'' in anticipating higher rates, he said.
Treasuries rose earlier in the week after some investors bought bonds to match an increase in duration -- a measure of price sensitivity to changes in interest rates -- in the widely followed Lehman Brothers Aggregate Bond index. The index, which acts as the benchmark for about $2 trillion of bonds, now includes $83 billion of new government notes sold this month. The index's duration rose by 0.19 years.
Last Updated: November 29, 2003 10:16 EST |
