Treasury 10-year note yields traded at almost the highest level in two months before Federal Reserve Chairman Ben S. Bernanke testifies on the economy in Congress tomorrow.
U.S. government securities headed for their first monthly loss since January before St. Louis Fed President James Bullard and New York Fed President William C. Dudley speak today. Fed Bank of Chicago President Charles Evans said yesterday the economy has improved “quite a lot” and he would be amenable to the central bank slowing its asset purchases if he had confidence job growth would be maintained. The Fed publishes minutes tomorrow of its April 30 to May 1 policy meeting.
“People are wondering whether and if the chairman will move as some of the other Fed governors who are looking at tapering or ending QE,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “He’s been opposing that. The market is buying insurance on the potential that he could be more hawkish.”
U.S. 10-year yields were at 1.97 percent as of 9:08 a.m. New York time after rising to 1.98 percent on May 15, the highest since March 15. The price of the 1.75 percent note due in May 2023 was at 98 1/8.
Investors in Treasuries remained short for the fifth straight week, betting that the prices of the securities will drop, according to a survey by JPMorgan Chase & Co.
The proportion of net shorts was at 16 percentage points in the week ending yesterday, according to JPMorgan. The figure is down from 17 percentage points in the previous week.
The percent of outright longs remained at 13 percent, while outright shorts, or bets the securities will fall in value, slipped to 29 percent from 30 percent, the survey reported.
Investors raised neutral bets to 58 percent from 57 percent, the survey reported.
The U.S. central bank is scheduled to buy as much as $3.5 billion of securities maturing between August 2020 and May 2023 today, according to the New York Fed’s website. The bank is purchasing $85 billion of government and mortgage debt each month to cap borrowing costs and help the economy.
“Currently, we have the appropriate monetary policy in place,” Evans said in a speech in Chicago yesterday. “The U.S. economy seems to be performing pretty well right now.”
Evans said he expects to see “self-sustaining growth” at “escape velocity” in 2014.
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.
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.