Treasuries Little Changed Before U.S. Data, on Fed Rates Outlook

By Anchalee Worrachate and Wes Goodman

Treasuries were little changed before publication of an index of leading indicators that economists said rose for a seventh month in August.
Benchmark 10-year yields touched the highest level since July as a vote in Scotland to remain in the U.K. curbed demand for the relative safety of U.S. debt. Fifty-five percent of voters supported the “no” campaign compared with 45 percent who backed independence, according to overnight counting. The Federal Reserve this week raised its estimate for how far it will increase interest rates next year.
“Scotland voted to stay in the U.K., and that helped to remove a great degree of uncertainty, reducing demand for haven assets in
general,” said Nick Stamenkovic, senior fixed-income strategy at RIA Capital Markets Ltd. in Edinburgh. “And for Treasuries in particular, expectations for a Fed rate hike next year are pushing yields higher.”
The benchmark 10-year note yielded 2.62 percent at 7:38 a.m. New York time, according to Bloomberg Bond Trader data. The rate climbed to 2.65 percent earlier, the highest since July 7, and is also little changed this week. The 2.375 percent note due in August 2024 was at 97 29/32.
Stamenkovic said the 10-year yield may rise to as high as 3 percent by year-end, compared with 2.75 percent based on the median of estimates in a Bloomberg survey.
Investors who had purchased Treasuries as a hedge against financial-market turbulence during the vote on independence are unwinding the trade, said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo.

Better Together

The pro-union Better Together campaign backed by Prime Minister David Cameron and the main U.K. parties had a wider margin of victory than suggested in opinion polls. The result was based on all 32 local authorities that declared after a record turnout of more than 90 percent in some regions.
Peter Kellner, president of the YouGov Plc research company, said concerns that independence could hurt the economy had pushed voters away from “yes.”
Treasuries handed investors a loss of 1.3 percent this month through yesterday, according to the Bloomberg U.S. Treasury Bond Index.
Fed officials on Sept. 17 boosted their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, from 1.125 percent in June. Policy makers cut the monthly pace of debt purchases by $10 billion for the seventh consecutive meeting, with the intention of ending them after October.

Mixed Data

A report today will show an index (BUSY) of leading economic indicators rose 0.4 percent in August, versus 0.9 percent in July, based on a Bloomberg News survey of economists. Data this month have shown a slowdown in employment growth, a pickup in retail sales and a slump in housing starts. Figures on manufacturing were mixed.
The Bank of America Merrill Lynch MOVE index, a gauge of Treasuries volatility, dropped to 62.03 yesterday, the lowest on a closing-price basis since Sept. 9.
Treasury yields showed inflation expectations tumbled to the lowest level in 14 months.
The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.03 percentage points. It dropped to 2.02 yesterday, the lowest level since July 2013.
Five-year inflations swaps headed for an 11th weekly decline, the longest run on record based on data compiled by Bloomberg that go back to 2004. The swaps allow investors to exchange fixed-interest rates for returns equivalent to the nation’s consumer-price index.
“People are just staying away from the bond market because they all expect the Fed to raise rates,” said Ali Jalai, a bond trader in Singapore at Scotiabank, a unit of Bank of Nova Scotia, one of 22 primary dealers that trade directly with the Fed. “I don’t think low inflation by itself is enough to get people to turn bullish on fixed income.”