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Treasuries Gain This Week as Fed Rate-Cut Speculation Increases
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By Annie Pinkert
Nov. 25 (Bloomberg) -- Treasuries gained this week, pushing yields on benchmark 10-year notes to a nine-month low, as speculation increased that slower economic growth will prompt the Federal Reserve to reduce interest rates next year.
``We have had somewhat weak data'' including weaker than- expected reports on consumer confidence that pushed yields to the lower end of the recent trading range, said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc.
Ten-year note yields fell 5 basis points, or 0.05 percentage point, this week to 4.55 percent, according to bond broker Cantor Fitzgerald LP. They touched 4.525 percent yesterday, the lowest since Feb. 23. The price of the 4 5/8 percent note due in November 2016 rose 12/32, or $3.75 per $1,000 face amount, to 100 18/32. Yields move inversely to prices.
Economic reports this week showing increases in jobless claims as well as weaker-than-expected confidence among U.S. consumers prompted investors to raise their bets that the Fed will reduce interest rates next quarter. Interest-rate futures showed that odds of a rate cut in the central bank's target borrowing rate increased to 51 percent from 34 percent last week.
Housing Market
Markets in the U.S. and Japan were closed Nov. 23 for holidays. The Securities Industry and Financial Markets Association recommended a trading stop at 2 p.m. New York time yesterday.
``The environment looks relatively positive for Treasuries,'' said John Canavan, a fixed-income analyst at Stone & McCarthy Research in Princeton, New Jersey. ``The market will continue to buy on dips.''
Advisers to President George W. Bush on Nov. 21 reduced their outlook for economic growth next year to 2.9 percent from 3.6 percent in June, due to a weakening housing market.
A report next week will probably show existing home sales fell to an annualized rate of 6.15 million in October, the lowest since 2004, according to economists surveyed by Bloomberg News. Notes rose the most in almost three weeks on Nov. 17 after a government report showed housing starts fell to the lowest in more than six years last month.
With the ``economic outlook being sort of negative and bullish for the bond market, we see a continued weak picture which will lead investors to revise their Fed easing expectations, which could potentially cause yields to break through 4.53,'' said Bernd Wuebben, a senior bond market strategist at primary dealer BNP Paribas Securities Corp. in New York.
Fed Expectations
The Fed has held its target rate for inter-bank lending at 5.25 percent since June, following 17 straight quarter-percentage point increases since June 2004. Minutes released Nov. 21 from the Fed's October meeting showed all but one of the 12 regional bank heads voted not to boost the discount rate.
St. Louis Fed President William Poole said in a Nov. 22 interview that economic reports may indicate that inflation is ``leveling off or declining,'' and the central bank's target borrowing rate is ``just about right.''
Federal Reserve Governor Kevin Warsh said the prior day that inflation remains too high during a speech at the New York Stock Exchange. All Fed governors vote on interest-rate policy.
Treasuries and European bonds rose yesterday as the dollar weakened to its lowest in 19 months against the euro, raising concern the surge in the currency will slow economic growth in Europe and make exports from the region more expensive.
Consumer Confidence
The U.S. currency extended its losses after breaching $1.30 against the euro for the first time since April 2005, a level where traders had placed automatic orders to sell the dollar.
Initial jobless claims climbed by 12,000 to 321,000 in the past week, the Labor Department said on Nov. 22. Economists had forecast claims of 310,000, according to the median estimate in a Bloomberg News survey.
A separate report showed consumer confidence this month was weaker than analysts projected. The University of Michigan revised down its gauge of sentiment this month among Americans, to 92.1 from an initial estimate of 92.3. The median estimate of economists in a Bloomberg survey was for an adjustment up to 93.3. In October, the gauge reached a 15-month high of 93.6.