U.S. 10-year yield at almost two-month high before Fed updates

Bernanke Focus

Bernanke will testify before the Joint Economic Committee tomorrow and may provide clues as to whether he sees the Fed making enough progress toward its goal of substantial improvement in the labor market to warrant reducing stimulus.

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities was at 2.27 percentage points today, at almost the 2.23 percentage points reached May 17, the least since Aug. 9, according to Bloomberg data. The consumer price index decreased 0.4 percent, the biggest decline since December 2008, after falling 0.2 percent in March, according to Labor Department figures released last week.

The Treasury will sell $13 billion in 10-year TIPS on May 23. It sold an equal amount of the securities on March 21 at a yield of negative 0.602 percent.

Budget Deficit

Economists predict a report tomorrow will show existing home sales increased in April, while data the following day will show initial jobless claims and continuing claims both declined last week.

While some economic data are improving, Moody’s Investors Service said yesterday that U.S. policy makers must address debt loads projected to rise later this decade to avoid a 2013 downgrade.

The U.S. budget deficit will drop to $378 billion in 2015 from a record $1.4 trillion in 2009, according to Congressional Budget Office data. The federal government will post a $642 billion deficit this year, the first time in five years that the shortfall has been less than $1 trillion.

“The recent pick-up in the U.S. economy and the public deficit is credit positive for U.S. ratings,” analysts led by Vincent Chaigneau, head of fixed-income strategy at Societe Generale SA in Paris wrote in a note to clients today. “Moody’s recognizes that in its latest comments, but therein lies the danger - complacency.”

Moody’s said Sept. 11 that the U.S.’s top Aaa rating would probably be cut to Aa1 if lawmakers don’t reach an agreement on reducing the debt ratio.

“The fact that it showed much lower debt levels going forward, we view as a positive development,” Steven Hess, senior vice-president at Moody’s in New York, said yesterday in a telephone interview of the CBO forecast. “More needs to be done on the policy front to address this rising debt ratio.”

Lower ratings don’t necessarily correspond to higher borrowing costs. Standard & Poor’s, the world’s largest credit rating company, reduced the U.S. ranking to AA+ from AAA in August 2011. Yields on 10-year Treasuries dropped 0.74 percentage point in the seven weeks following the cut to a then- record 1.67 percent.

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