Treasuries fell, eroding a gain from yesterday, before a government report that economists said will show initial claims by Americans for jobless benefits were close to a four-year low.
U.S. government securities have handed investors a 0.9 percent loss this month, according to Bank of America Merrill Lynch indexes, on speculation yields will increase as the economy expands. Ten-year debt yields 0.89 percentage points less than the rate of inflation, compared with an average of 1.16 percentage point more for the past five years. The U.S. plans to sell $29 billion of seven-year debt today.
“The general macroeconomic backdrop is definitely rosier in the U.S.,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “If we continue to see the economic traction, then Treasury yields will continue to drift higher. Over time it’s going to be increasingly difficult to keep 10-year yields” at about 2 percent, he said.
The benchmark 10-year yield increased three basis points, or 0.03 percentage point, to 2.03 percent at 10:05 a.m. London time, according to Bloomberg Bond Trader prices. The 2 percent note due February 2022 declined 1/4, or $2.50 per $1,000 face amount, to 99 23/32.
The yield will advance to 2.49 percent by year-end, according to a Bloomberg survey of financial companies, with the most recent forecasts given the heaviest weightings.
Confidence Report
Treasuries stayed lower as a report showed German business confidence rose more than economists forecast to a seven-month high in February, adding to evidence the global economic recovery may be sustained. German 10-year bund yields increased one basis point to 1.90 percent.
The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, climbed to 109.6 from 108.3 in January. That’s the fourth straight gain and the highest reading since July. Economists predicted an increase to 108.8, according to the median of 38 estimates in a Bloomberg News survey.
The Federal Reserve is scheduled to sell as much as $8.75 billion of Treasuries due from April 2014 to February 2015 today, according to the New York Fed’s website. The bank is replacing shorter-maturity securities in its holdings with longer-term debt to cap borrowing costs.
U.S. Jobless
U.S. initial claims for jobless insurance totaled 355,000 last week, according to a Bloomberg News survey of economists before the Labor Department report. The figure was 348,000 for the seven days ended Feb. 11, the least since March 2008.
“Upside risks remain” in the inflation outlook, Bank of America, one of the 21 primary dealers that trade with the Fed, said in a report yesterday. The dangers include rising apparel costs and oil “price shocks,” according to the report by Bin Gao and Adarsh Sinha in Hong Kong and Jabaz Mathai in New York. “Inflation expectations will continue to rise,” they wrote.
Oil rose to its highest level in nine months, with Brent futures advancing as much as 0.8 percent to $123.85 a barrel in London, their strongest since May 3.
Treasuries rose yesterday on speculation Europe’s rescue package for Greece won’t resolve the region’s debt crisis, keeping alive demand for the relative safety of U.S. securities. Fitch Ratings lowered Greece’s credit grade and said a default is highly likely.
‘Room to Rally’
“The Greek situation is still hanging over investors’ minds,” George Goncalves, head of rates research at Nomura Securities International Inc. in New York, wrote in a report yesterday. U.S. government debt “should have room to rally a bit,” according to Nomura, also a primary dealer.
A $35 billion five-year auction yesterday drew a yield of 0.9 percent, compared with a forecast of 0.901 percent in a Bloomberg survey of seven of the primary dealers.
The U.S. seven-year notes being sold today yielded 1.46 percent in pre-auction trading. The prior sale of the security on Jan. 26 drew a record low auction yield of 1.359 percent.
Investors bid for 2.73 times the amount offered in January, compared with an average of 2.81 for the past 10 auctions.
The U.S. also sold $35 billion of two-year debt on Feb. 21. This week’s note auctions will raise $38.8 billion of new cash as maturing securities available for reinvestment total $60.2 billion, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance.
Inflation Bets
Traders are adding to inflation bets.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, widened to as much as 2.33 percentage points yesterday, the most since August. It was at 2.31 percentage points today. The average over the past decade is 2.14 percentage points.
Five-year inflation swaps, which allow investors to exchange fixed interest rates for returns equivalent to the consumer price index, climbed to as much as 2.45 percent yesterday, the highest level since July 8. The 10-year average is 2.33 percent.
Fed policy makers set a target of 2 percent for inflation on Jan. 25 and forecast costs in the economy will probably fall short of the goal this year.
The price gauge that the central bank uses is the personal consumption expenditures index, which climbed 2.4 percent for the 12 months ending Dec. 31. The measure increased 1.8 percent after taking out food and energy costs.
