Treasury curve close to steepest since May on economic optimism

‘Inflationary’ Fed

The Fed’s preferred measure of inflation expectations, the five-year, five-year forward break-even rate, was 2.82 percent, compared with a 2012 average of 2.6 percent. The gauge projects the expected pace of consumer price increases from 2018 to 2023.

“People still expect Fed policy will be inflationary,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, a primary dealer. “Most signs in the economy show that it’s stabilizing and may get a bit better although it’s not close to any of the thresholds the FOMC talked about in terms of removing accommodation. We still have a long way to go.”

The Federal Open Market Committee for the first time in December linked the outlook for its main interest rate to unemployment and inflation targets. The central bank said the rate would stay close to zero “at least as long” as unemployment remains above 6.5 percent and inflation projections are for no more than 2.5 percent.

The unemployment rate, which has been above 7 percent since December 2008, held at 7.8 percent in November. In the 12 months ended in November, consumer prices rose 1.8 percent, the Labor Department reported in December.

Treasury Returns

The Fed purchased $5.6 billion of Treasuries maturing from October 2017 to September 2018 today as part of its monthly purchases of $85 billion of government and mortgage debt to spur the economy by putting downward pressure on interest rates.

Treasuries handed investors a loss of 0.6 percent this year through yesterday, according to Bank of America Merrill Lynch indexes. German bonds dropped 1.6 percent and Japan’s fell 0.1 percent, the data show.

The MSCI All-Country World Index of shares returned 3 percent in 2013 including reinvested dividends, according to data compiled by Bloomberg.

“There could be some slight easing in yields in the U.S. as the risk-on tone loses momentum,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “Economic fundamentals are weighing very slightly on price action. It makes sense to see some consolidation today.”

Bloomberg News

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