May 16 (Bloomberg) -- Treasuries erased losses as Federal Reserve policy makers said more economic stimulus may be needed and the European Central Bank said it will suspend some operations with Greek banks due to incomplete recapitalizations.
Ten-year notes fluctuated after Fed officials said a loss of momentum or increased risks to their economic outlook could warrant additional action to keep the recovery on track, minutes of their last meeting showed. U.S. government debt declined earlier as optimism about the economic outlook damped demand for safe assets.
“With the minutes, there probably is a little recalibration going on,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “There’s an indication that the Fed has a certain degree of resolve to do something if the economy should falter.”
The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 1.76 percent at 2:28 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent security due May 2022 rose 3/32, or 94 cents per $1,000 face amount, to 99 30/32.
Ten-year yields climbed as high as 1.82 percent earlier after reports showed U.S. builders broke ground on more homes than forecast in April and industrial production climbed more than projected, propelled by gains in auto manufacturing and utility use.
Yield Levels
The yield also touched 1.75 percent, the lowest since Oct. 4. It reached a record low 1.67 percent on Sept. 23 after a Group of 20 finance chiefs failed to ease concern the global economy was on the brink of another recession.
Treasuries returned 2.7 percent in the past two months, Bank of America Merrill Lynch indexes show, as Europe’s debt crisis worsened. Investors tracking the MSCI All-Country World Index of stocks lost 8.4 percent in the same period.
The U.S. government will sell $13 billion of 10-year inflation-indexed bonds tomorrow.
The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, was 2.11 percentage points after falling to 2.09 points May 14, the least since Feb. 1. The figure is close to the 2.15 percentage point average during the past decade.
Fed Policy
The Fed cut its target for the federal funds rate, which banks charge each other for overnight loans, to a range of zero to 0.25 percent in December 2008. It repeated in its latest statement April 25 that economic conditions will probably warrant keeping the target low at least through late 2014.
“Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough,” according to minutes of the Federal Open Market Committee’s April 24-25 meeting released today in Washington.
“Markets just reacted to increased odds of potential policy,” said John Briggs, a U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 21 primary dealers that trade with the Fed. “If they’re going to do additional easing in a few months, or a month or two, that means the first hike is further off.”
Housing starts rose 2.6 percent to a 717,000 annual rate from March’s revised 699,000 pace that was stronger than previously reported, Commerce Department figures showed today in Washington. The median estimate of 80 economists surveyed by Bloomberg News called for a rise to 685,000.
Output at factories, mines and utilities increased 1.1 percent last month, the most since December 2010, after a 0.6 percent decline in March that was revised from no change, the Federal Reserve reported today in Washington. Economists forecast a 0.6 percent gain, according to the Bloomberg News survey median.
“The data is actually coming in much better than I would have expected, especially on the housing front,” said Krishna Memani, director of fixed income at OppenheimerFunds Inc. in New York, who manages $70 billion. “A lot of pessimism has already been priced in. At 1.80 percent, it doesn’t require” the Fed “to say anything to go to 2.20 percent, 2.30 percent fairly quickly.”
The 10-year rate will increase to 2.51 percent by year-end, according to the average forecast in a Bloomberg survey of financial companies, with the most recent projections given the heaviest weightings.
The ECB said it will temporarily stop lending to some Greek banks to limit its risk as President Mario Dragi signaled the ECB won’t compromise on key principles to keep Greece in the euro area.
ECB Policy
The Frankfurt-based central bank said it will push the responsibility for lending to some Greek financial institutions onto the Greek central bank until they have sufficiently boosted their capital. “Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations,” the ECB said in an e-mailed statement.
Greece’s inability to form a government has driven concern the country will renege on pledges to cut spending as required by the terms of its two bailouts negotiated since 2010, pushing borrowing costs higher and potentially leading it to leave the euro area. Greek 10-year yields rose above 30 percent today for the first time since the nation’s debt was restructured in March.
‘The concern here isn’t so much about Greece, per se, but about the contagion effect,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, a primary dealer. “This increases uncertainty about the likely events of the next couple of months and the contagion effect on the European banking system.”
