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Treasuries fall over inflation concerns Original Source Link: (May no longer be active)
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U.S. Treasuries Decline as GDP Report Sparks Inflation Concern
July 29 (Bloomberg) -- U.S. Treasuries fell, capping their biggest monthly drop since April 2004, after a report raised speculation the economy is growing fast enough for the Federal Reserve to keep raising interest rates beyond year-end.
Investors this month increased bets a strengthening economy may cause inflation to accelerate. Treasuries, which had the biggest fluctuation of any government debt market, hit their lows of the day after an index of manufacturing in the Chicago area rose more than forecast.
``Interest rates are probably going higher,'' pushing bonds lower, Andrew Harding of the Allegiant Funds who oversees more than $13 billion, said in an interview from Cleveland. ``There is no soft patch. The Fed has a license to raise rates.''
The yield on the 10-year note climbed 9 basis points, the most this week, to 4.28 percent as of 4:25 p.m. in New York. A basis point is 0.01 percentage point. The yield has ranged from about 3.92 percent to about 4.29 percent the past three months, and may trade from 4.5 percent to 4.75 percent by year-end, Harding said.
The price of the benchmark 4 1/8 percent note due in May 2015 more than 5/8, or $6.25 per $1,000 face amount, to 98 25/32, according to bond broker Cantor Fitzgerald LP. The note had its fifth straight weekly drop, the longest such stretch this year.
Merrill Lynch & Co.'s U.S. Treasury Master Index declined 1.35 percent this month, the first decline since March and its worst month since April 2004, when it fell 3.15 percent.
GDP
The U.S. economy expanded at a 3.4 percent annual pace in the April through June period, the ninth straight quarter exceeding 3 percent, compared with 3.8 percent in the first quarter. Economists expected a gain of 3.5 percent, based on the median of 66 forecasts in a Bloomberg News survey.
``The bond market really only cares about GDP to the extent it impacts Fed policy,'' William Prophet, an interest rate strategist at Stamford, Connecticut-based UBS Securities LLC, said before the report. ``As long as the Fed keeps tightening, short-term rates have no choice but to go up. Ten-year rates will probably go up but there's no guarantee.''
Two-year Treasury yields rose 7 basis points to 4.01 percent, the first time they have risen above 4 percent in four years. The yield is up from 3.58 percent in June.
Investors this week pushed up two-year Treasury yields, which are more sensitive to changes in Fed monetary policy, to within 24 basis points of 10-year Treasuries this week. The gap, which was 185 basis points a year ago, is the slimmest since early 2001. The difference widened 2 basis points today to 27 basis points on concern about chances for faster inflation.
Index Changes
``The two-year yield will continue to rise,'' said Gary Pollack, head of fixed-income trading at Deutsche Bank AG's investment-management unit in New York, which has about $12 billion in assets.
Treasuries reversed all of their gains made yesterday, when investors bought longer-maturity debt to match monthly changes in benchmark indexes.
``Yesterday's rally was a little exaggerated and today we're taking some of that back,'' said David Ging, a government bond strategist at Credit Suisse First Boston in New York. The GDP report ``was right in-line with expectations. It isn't going to change people's perception about the economy.''
Lehman Brothers Inc. this week said its U.S. Aggregate Bond Index will lengthen in duration by 0.07 year in August to 4.36 years. The increase in duration, which investors use to gauge the price sensitivity of bonds to changes in interest rates, is bigger than in July. The index is a benchmark for about $2 trillion in debt.
Fed Moves
The National Association of Purchasing Management-Chicago said today its Business Barometer, which is based on a survey of executives in the region, rose to 63.5 this month from 53.6 in June. A Bloomberg News survey of 54 economists expected a score of 54, the median forecast.
The Fed has raised its target interest rate on overnight loans between banks nine times since June 2004, to 3.25 percent from 1 percent, to keep consumer prices in check. Fed Chairman Alan Greenspan last week said the U.S. economy was on ``firm footing.''
``The prospects are that the Fed tightening process will go considerably further than expected,'' Goldman, Sachs & Co. Chief U.S. Economist William Dudley said in a report to clients today. His forecast is for the Fed's target rate to rise 4.5 percent, an estimate he said he may increase.
Yields on December Eurodollar futures rose 5 basis points to 4.265 percent, and are up from about 3.945 percent a month ago. The futures settle at a three-month lending rate that has averaged 21 basis points more than the central bank's target over the past 10 years.
Inflation Revisions
The government's year-over-year index of prices paid by consumers for goods and services excluding food and energy, an inflation measure favored by Fed policy makers, rose at a 1.8 percent annual rate, slower than the 2.4 percent in the prior three months and the smallest gain since the third quarter.
The measure for prior periods was revised higher.
Also today, the University of Michigan said its consumer sentiment index for July was 96.5, the same as its preliminary estimate, and the highest since December.
Dallas Fed President Richard Fisher said today at the Council of Economic Advisors in Utah said the economy is performing ``superbly.'' On June 1, Fisher roiled markets when he said the Fed is ``clearly in the eighth inning of a tightening cycle.'' Fisher votes on monetary policy.
It ``makes sense'' to keep raising interest rates and the economy is in ``reasonably good shape,'' said Janet Yellen, president of the San Francisco Federal Reserve Bank, to community leaders in Portland, Oregon.
The world's biggest movers are based on changes in price or yield and are screened for the size of the market and amount of daily trading.
Last Updated: July 29, 2005 20:04 EDT
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