Saturday, June 20, 2009

the Fed talking about an exit strategy, so that helps to contain longer-term inflation pressures

TO BE NOTED: From Bloomberg:

"Treasuries Rise, Led By 30-Year Bonds, as Consumer Prices Fall

By Dakin Campbell and Susanne Walker

June 20 (Bloomberg) -- Treasuries rose, with 30-year bond yields falling the most in five weeks, as a report showing consumer prices tumbled the most in six decades eased concern efforts to revive the economy would generate inflation.

U.S. debt gained as traders bet losses that pushed 10-year yields above 4 percent and 30-year bond yields to near 5 percent last week wouldn’t be sustained. The cost of living dropped 1.3 percent in the year ended in May, the most since 1950. The Treasury said it will sell a record $104 billion in two-, five- and seven-year notes next week.

“There are a number of factors that seem to favor longer- term bonds,” said Christopher Sullivan, who oversees $1.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “Foremost among them was valuation. They shot up to 4 percent and value investors came in. That was then confirmed by the inflation data.”

Thirty-year yields fell 14 basis points this week, or 0.14 percentage points, to 4.50 percent, according to BGCantor Market Data. It was the most since shedding 19 basis points in the week ended May 15. The 4.25 percent security due May 2039 rose 2 6/32, or $21.88 per $1,000 face amount, to 95 27/32.

Ten-year yields fell one basis point to 3.79 percent. Yields reached as high as 3.88 percent.

Exit Strategy

Longer-term debt outperformed shorter-term securities as investors prepared for next week’s auctions. The U.S. will sell $40 billion in two-year notes on June 23, $37 billion of five- year debt the following day and $27 billion of seven-year securities on June 25.

“The long end is performing relatively well versus the front end because of the supply that we’re getting next week,” said Alex Li, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of 17 primary dealers that trade with the Federal Reserve. “It also relates to the Fed talking about an exit strategy, so that helps to contain longer-term inflation pressures.”

Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank is developing plans to reverse the “enormous amount” of monetary stimulus to prevent inflation from accelerating as the economy picks up. He spoke yesterday in an interview on CNBC Television.

President Barack Obama signed a $787 billion, two-year economic stimulus plan in February. The Fed announced on March 18 it would buy up to $300 billion in Treasuries over six months to lower consumer borrowing costs, as well as purchasing $1.25 trillion of bonds back by home loans.

FOMC Meeting

All told, the U.S. government and the central bank have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, fell to 1.91 percentage points yesterday, from 2.01 percentage points two weeks ago. The figure has averaged 2.23 percentage points in the past five years.

The Federal Open Market Committee concludes its two-day meeting June 24 amid speculation officials are considering whether to use the policy statement to suppress any speculation they’re prepared to raise interest rates as soon as this year. The Fed’s target rate is at a record low range of zero to 0.25 percent.

Traders reduced bets policy makers will raise borrowing costs by the end of the year, according to futures on the Chicago Board of Trade. Expectations fell to a 47 percent chance, from more than 60 percent a week ago.

Foreseeable Future

“We don’t see a rate hike occurring anytime in the foreseeable future,” said Kevin Flanagan, a Purchase, New York- based fixed-income strategist for Morgan Stanley Smith Barney. “The market doesn’t believe the Fed will make an announcement about buying more Treasuries.”

The consumer price index rose 0.1 percent in May after being unchanged a month earlier, the Labor Department said June 17 in Washington. That’s below the 0.3 percent forecast by 75 economists surveyed by Bloomberg News.

Investors also bought Treasuries as a safe haven yesterday after Moody’s Investors Service said it is considering cutting California’s credit rating.

California’s rating, already the lowest among U.S. states, may be cut by Moody’s as government leaders seek ways to eliminate a $24 billion budget deficit. The move would affect $72 billion of debt, Moody’s said in a statement. California’s full faith and credit pledge is rated A2 by Moody’s, five steps below top investment grade.

Mortgage Rates

U.S. government debt handed investors a loss of 4.3 percent since March through yesterday, according to Merrill Lynch & Co. indexes. U.S. securities are set for the worst quarter since losing 5.9 percent in the first three months of 1980, the data show.

Rising yields have complicated the central bank’s efforts to lower consumer borrowing costs. Thirty-year fixed-rate mortgages rose to 5.43 percent on June 18, the first gain in six days, from as low as 4.85 percent in April, according to in North Palm Beach, Florida.

The Federal Reserve Bank of Philadelphia’s general economic index climbed to minus 2.2 from minus 22.6 in May, the bank said on June 18. The Conference Board’s index of U.S. leading economic indicators rose more than forecast in May for the second straight month.

To contact the reporters on this story: Dakin Campbell in New York at; Susanne Walker in New York at

Last Updated: June 20, 2009 08:00 EDT "

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