Treasuries Fall as Producer Prices Increase, Debt Auctions Loom
By Susanne Walker and Kim-Mai Cutler
Feb. 19 (Bloomberg) -- Treasuries fell after a government report showed producer prices rose more than forecast last month and speculation mounted the U.S. will have to boost yields to attract buyers to its note auctions next week.
hit their highs of the day as the producer-price report signaled a rise in inflation. Next week’s sales of two-, five- and seven-year notes may total a record $97 billion, according to a forecast by Wrightson ICAP LLC. Stocks gained.
“PPI caught some people by surprise,” said Andrew Richman
, who oversees $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank’s personal asset management division. “Eventually this should be inflationary, and people are starting to see that now.”
The 10-year note’s yield
climbed 10 basis points, or 0.10 percentage point, to 2.86 percent at 10:07 a.m. in New York, according to BGCantor Market Data. It rose 11 basis points yesterday. The price of the 2.75 percent security due in February 2019 decreased 27/32, or $8.44 per $1,000 face amount, to 99 2/32. The 30-year bond yield increased 10 basis points to 3.65 percent.
The yield on the benchmark 10-year note will drop to 2.63 percent by March 31, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The rate slid to a record low of 2.04 percent on Dec. 18 and averaged 4.55 percent this decade.
The producer price index increased 0.8 percent last month as firms tried to boost earnings at the start of the year before demand weakened further, a Labor Department report today showed. The median forecast in a Bloomberg News survey of economists was a rise of 0.3 percent.
The index of leading economic indicators rose 0.4 percent in January, more than forecast, the Conference Board said. It was led by a jump in money supply that masked continued deterioration elsewhere in the economy.
The Standard & Poor’s 500
Index gained 0.8 percent, and the MSCI World
Index increased 1.2 percent.
“Treasuries have been lower because of strong stocks and because of the coming announcement this morning of the two-, five- and seven-year notes,” said James Collins
, interest rate strategist in the futures division at Citigroup Global Markets Inc. in Chicago, one of the 16 primary dealers that trade with the Federal Reserve.
The risk for bond bulls is that government and central-bank efforts to spur growth will begin to take hold. The U.S. economy will shrink in the first half of 2009 and then start growing in the second, Bloomberg surveys of economists show.
President Barack Obama
plans $787 billion in spending and tax cuts, and he pledged yesterday to make $275 billion available to reduce mortgage payments for some homeowners. The Fed kept the target lending rate in a range of zero to 0.25 percent at its January meeting and reiterated its commitment to help thaw frozen credit markets.
The government is borrowing unprecedented amounts to support its spending. The Treasury Department will announce today it plans to sell $41 billion in two-year notes, $31 billion in five- year securities and $25 billion in seven-year debt, according to Wrightson ICAP, a Jersey City, New Jersey-based research unit of the world’s largest inter-dealer broker. All the amounts would be records.
The record amount of coupon securities sold by the Treasury during a single week was in the seven days ended Jan. 25, when it auctioned $78 billion of two- and five-year notes and 20-year inflation-indexed bonds.
Corporate Bond Sales
Merrill Lynch & Co.’s U.S. Corporate & High Yield Master index returned 1.8 percent so far in 2009, versus a 2.5 percent loss for its U.S. Treasury Master index. Treasuries returned 0.6 percent in February, rebounding from a 3.1 percent loss in January that was the worst in almost five years.
Companies have sold about $36.5 billion of bonds this week, compared with $12.9 billion a week earlier, according to data compiled by Bloomberg. Sales this year total about $226 billion, compared with $138.3 billion during the same period of 2008, the data show.
Mizuho Financial Group Inc., Japan’s second-largest bank, and Dole Food Co., the world’s largest fresh-fruit and vegetable producer, are among borrowers seeking to sell at least $13 billion of bonds in the U.S., Bloomberg data show.
Treasuries dropped yesterday as the Fed signaled it’s not going to purchase U.S. securities to lower consumer borrowing costs any time soon.
Policy makers decided the purchase of longer-term Treasuries would “only modestly improve” credit markets, according to minutes of their January meeting. Following through on programs to buy mortgage-backed securities and agency debt was likely to be “more effective,” the minutes showed.
Yields indicate credit markets haven’t fully recovered from last year’s rout.
The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread
, narrowed to 0.94 percentage point from 4.64 percentage points in October. The gap averaged 0.27 percentage point from 2002 through 2006, before the credit crisis began in 2007.
Average 30-year fixed mortgage rates
rose to 5.16 percent in the seven days ended Feb. 12 from 4.96 percent four weeks earlier, according to mortgage finance company Freddie Mac. Rates
are about 2.27 percentage points higher than 10-year Treasury yields, widening from 1.48 percentage points five years ago.
To contact the reporters on this story: Susanne Walker
in New York at firstname.lastname@example.org
; Kim-Mai Cutler
in London at email@example.com
Last Updated: February 19, 2009 10:12 EST