Treasuries touch one-week low on bets Bernanke damps taper talk

Federal Reserve Chairman Ben Bernanke (Source: Bloomberg) Federal Reserve Chairman Ben Bernanke (Source: Bloomberg)

Treasury 10-year note (CBOT:ZNU13) yields touched a more than one-week low amid speculation Federal Reserve Chairman Ben S. Bernanke will seek to damp investor expectations of a reduction in stimulus when he speaks to Congress tomorrow.

Treasuries erased an earlier gain after the cost of living in the U.S. rose in June by the most in four months as gasoline prices increased. Pacific Investment Management Co.’s Bill Gross added to holdings of U.S. government debt in his flagship fund in June while betting incorrectly on gains in inflation-indexed securities in the first half of 2013.

“The market is anticipating a dovish, defensive presentation -- and if it doesn’t get enough of that, they may see it as hawkish,” Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co., said of Bernanke’s two days of testimony in Washington. “Inflation is a non-issue and last week he seemed to be more concerned about deflation than inflation. He’s going to lean to the dovish side. The market is already pricing that in.”

The benchmark 10-year yield was little changed at 2.54% as of 10:03 a.m. New York time, according to Bloomberg Bond Trader data. It reached 2.51%, lowest since July 5. The price of the 1.75% security maturing in May 2023 traded at 93 5/32.

TIPS Returns

As of yesterday, investors in U.S. government securities linked to consumer-price gains have lost 7.7% this year, headed for the first annual decline since 2008, Bank of America Merrill Lynch index figures showed. Conventional Treasuries fell 2.7% over the same period.

The difference in yield between 10-year notes and similar- maturity Treasury Inflation Protected Securities, a measure of trader expectations for inflation over the life of the debt called the break-even rate, was at 2.09 percentage points, set for the highest close since June 11. That compares with an average of 2.37 percentage points in the past year.

The Fed’s price indicator for the period from 2018 to 2023, known as the five-year five-year forward break-even rate, fell to a two-week low of 2.41% as of July 11.

The consumer-price index increased 0.5% after a 0.1% gain the prior month, a Labor Department report showed today in Washington. The median forecast in a Bloomberg survey called for a 0.3% rise. Overall consumer prices increased 1.8% in the 12 months ended in June, more than projected and after a 1.4% year-over-year gain the prior month. The core measure, which excludes food and fuel, climbed 0.2% from May.

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