US Treasuries snapped a decline from yesterday as the Federal Reserve prepared to buy as much as $6 billion of U.S. debt today, after saying it intends to stick to its plan to purchase $600 billion of securities by June 30.
Yields have risen too far given that inflation is running slower than the Federal Reserve wants, according to Nikko Cordial Securities Inc., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s third-largest publicly traded bank. The U.S. government is scheduled to sell $29 billion of seven-year debt today, the last of three note auctions this week.
“It will take a few quarters for inflation to pick up,” said Hiroki Shimazu, an economist at Nikko Cordial in Tokyo. “That will make Treasury yields fall in the next few months.”
Ten-year notes yielded 3.41 percent as of 6:51 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 traded at 93 1/2. The yield increased eight basis points yesterday.
U.S. government securities have fluctuated between gains and losses for the past eight sessions. The 10-year rate will fall to 3 percent by March 31, Shimazu said.
The Fed will buy $4 billion to $6 billion of notes maturing from July 2012 to July 2013 today, according to its website.
The euro was near a two-month high versus the dollar before a German report forecast to show consumer prices rose at the fastest pace in two years. The 17-nation currency rose to $1.3722 yesterday, the strongest since Nov. 22.
Extra Yield
The extra yield investors demand to hold two-year German notes instead of similar-maturity Treasuries expanded to 70 basis points today, the most since January 2009.
The difference between 2- and 30-year rates was 3.96 percentage points. The spread widened to a record 3.98 percentage points on Jan. 20 based on closing levels, indicating investors have been demanding greater compensation for rising costs in the economy.
Ten-year Treasury Inflation Protected Securities show bondholders expect the consumer price index to increase 2.27 percentage points annually on average over the life of the debt. Economists surveyed by Bloomberg forecast an inflation rate this year of 1.7 percent.
Treasuries fell yesterday as the Fed maintained its bond- purchase program while saying the pace of economic expansion is insufficient to lower unemployment. The jobless rate has been more than 9 percent for 20 months.
Government securities also declined after the U.S. sold $35 billion of five-year notes and a report showed sales of new homes rose more in December than economists forecast.
‘Full Speed Ahead’
While commodities have risen, “longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward,” the central bank said in a statement yesterday after its two-day meeting.
The inflation gauge watched by the Fed, which excludes food and energy costs, increased 0.8 percent in the 12 months through November. The figure is below the 1.6 percent to 2 percent range central bank officials say is consistent with achieving their legislative mandate for stable prices.
Treasuries are heading for a fourth monthly decline on signs the economy is improving. U.S. debt has handed investors a 3 percent loss since the end of September, based on Bank of America Merrill Lynch data.
The MSCI All Country World Index of stocks returned 11 percent in the period, according to data compiled by Bloomberg. U.S. corporate bonds fell 0.2 percent, the BOA indexes show.
Durable Goods
Orders for U.S. durable goods and pending home sales both rose in December, economists said before government and industry reports today. At General Electric Co., the world’s biggest maker of jet engines, operating earnings will increase “nicely” this year, Chief Executive Officer Jeffrey Immelt said Jan. 21.
The Fed’s purchases of Treasuries and mortgage debt reduce the supply of those securities, according to Fidelity Investments, the Boston-based fund manager that oversees $1.6 trillion of assets.
“The corporate bond market is still reasonably attractive,” David Prothro, a debt fund manager at Fidelity, wrote in a report yesterday on the company’s website. “The U.S. economy is stabilizing.”
The seven-year notes being sold today yielded 2.77 percent in pre-auction trading, compared with 2.83 percent at the previous sale of the securities on Dec. 29.
Investors bid for 2.86 times the amount on offer last month, up from 2.63 times in November. Indirect bidders, the class of investors that includes foreign central banks, bought 64.2 percent of the debt, versus a 10-sale average of 50.9 percent.
--Editors: Nicholas Reynolds, Jonathan Annells
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.
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