Treasuries drop as Fed’s Plosser says economic outlook positive

Bill Rates

One-month bills yielded negative 0.0051%.

The U.S. sold $15 billion in four week bills today at a rate of 0.0% for the second straight auction of the securities. Treasury cut the four-week bill weekly auction size to $15 billion at today’s sale, from $45 billion on Dec. 3. At the previous auction on Jan. 7, Treasury sold $18 billion of the securities.

The U.S. posted a record December budget surplus as higher payroll taxes, payments from Fannie Mae and Freddie Mac, and a declining unemployment rate helped the government’s finances. Federal revenue exceeded spending by $53.2 billion, compared with a deficit of $1.19 billion a year earlier, the Treasury Department said yesterday in Washington.

“We’ve seen continued cuts in bill supply that has limited the amount of short-term safe securities for investors who need to put money to work, and that has put pressure on bill yields,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, , one of 21 primary dealers that trade with the Fed. “It wouldn’t surprise me to see low to negative bill rates continue until the supply pressure eases up.”

Fed Policy

Bill rates are anchored as investors expect the Fed’s benchmark to remain in 2014 between zero and 0.25%, where they’ve stayed for five years, even as policy makers start reducing monetary stimulus. There’s an 81% chance the central bank rate will be unchanged by the December meeting, according to futures contracts data compiled by Bloomberg.

A contraction in the U.S. market for borrowing and lending securities amid rising interest rates and heightened global bank regulation will increase this year, according to Fitch Ratings.

The U.S. tri-party repurchase agreement market contracted $257 billion, or 14%, in 2013 to $1.61 trillion as of the end of 2013, according to Fed data, Fitch wrote in a report published today. A 28% decline in repos using agency mortgage-backed securities led the fall, while usage of Treasuries as collateral for the transactions also dropped, contracting 10%.

Yield Curve

The extra yield investors demand to hold 10-year securities instead of two-year notes widened to 249 basis points, after closing at 247 basis points yesterday. Historically, a steeper yield curve reflects investors anticipating faster economic growth.

Fed policy makers said on Dec. 18 they will cut their stimulus program of monthly bond purchases to $75 billion from $85 billion, citing improvements in the labor market. The central bank purchased $1.39 billion in Treasuries maturing between May 2038 and August 2043. Officials next meet on Jan. 28-29.

Plosser, a voter on the Federal Open Market Committee this year, said in a speech in Philadelphia he would prefer to end debt purchases before late 2014, yet he’s “glad that we have taken the first step.”

The U.S. economy should grow 3% in 2014 although that figure is far from “robust,” Plosser said. The growth may push the unemployment rate down to 6.2% by December, compared with the 6.7% rate last month, he said.

Bank Views

Fed Dallas President Richard Fisher said in the text of a speech he was “pleased” with the Fed’s decision to taper and “would have preferred” cutbacks by $20 billion per month, an increase compared with the current $10 billion planned monthly reductions.

Retail sales increased 0.2% last month after a 0.4% advance in November that was smaller than previously reported, Commerce Department figures showed in Washington. The median forecast of 86 economists surveyed by Bloomberg called for a 0.1% gain.

“People were surprised by the outsized gain in the current month, but there were downward revisions to the previous month,” said Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets unit, a primary dealer.

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