Tuesday, December 18, 2018
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Treasuries Decline Before Manufacturing, Factory Output Reports

Treasuries fell, snapping a two-day gain, before reports economists said will show manufacturing in the New York region grew at a faster pace and industrial production expanded for a second month.

U.S. securities due in 10 years or more extended this year's decline as the data added to signs the world's largest economy is gaining momentum and damped demand for the safest assets. Federal Reserve Chairman nominee Janet Yellen told Congress at a confirmation hearing yesterday that she will ensure monetary stimulus isn't removed too soon.

"Markets are bracing themselves for at least a couple of smaller upbeat economic data points such as the industrial production and empire state manufacturing," said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. "That might be the justification for people to say now let's consolidate profits."

The 10-year yield rose two basis points, or 0.02 percentage point, to 2.71 percent at 10:16 a.m. London time, according to Bloomberg Bond Trader prices. The 2.75 percent note due in November 2023 fell 1/8, or $1.25 per $1,000 face value, to 100 3/8. The rate has dropped four basis points this week, the first decline since the period ended Oct. 25.

Bayerische Landesbank's Daheim predicts the 10-year yield will likely "bounce around" within a range of 2.60 to 2.80 percent until year-end.

The 30-year bond yield added one basis point to 3.80 percent, down four basis points this week.

Treasuries due in 10 years and longer dropped 10 percent this year through yesterday, according to Bloomberg World Bond Indexes. (BUSY10) Those maturing between one- and three years returned 0.4 percent, the indexes show.
Economic Data

The Fed Bank of New York's general economic index rose to 5 this month from 1.5 in October, according to the median estimate of economists surveyed by Bloomberg News before the data today. Positive readings signal expansion in New York, northern New Jersey and southern Connecticut.

Economists in a separate survey estimate U.S. industrial production increased 0.2 percent in October from the previous month when it gained 0.6 percent.

Fed policy makers have pledged interest rates will stay at almost zero while unemployment remains above 6.5 percent. The jobless rate was at 7.3 percent last month, the Labor Department reported on Nov. 8.

Treasuries were still set for their first weekly advance this month on bets a central bank led by Yellen will prolong a policy of unprecedented bond buying.

"It's important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero," she said in Washington yesterday.
'Relieved' Market

Analysts cut year-end forecasts for 10-year yields to 2.73 percent, down from a projection of as much as 2.85 percent last month, according to the weighted average estimate in a Bloomberg survey.

"The market was relieved after Yellen's testimony that tapering will not start immediately," said Tsutomu Soma, manager of the fixed-income business unit at Rakuten Securities Inc. in Tokyo. "That would be good news for bonds."

The U.S. central bank currently buys $85 billion of Treasuries and mortgage-backed securities each month to keep downward pressure on borrowing costs. Officials will decide to pare their purchases to $70 billion a month at their March 18-19 meeting, according to the median of 32 economist estimates in a Bloomberg survey on Nov. 8.

The Fed will buy as much as $1 billion of Treasuries maturing between November 2024 and February 2031 today.
'Normalization Phase'

"From a risk reward perspective, they can certainly afford to keep policy very loose at this stage," said Andrew Wilson, head of fixed income at Goldman Sachs Asset Management in London, speaking on Bloomberg Television's "On the Move" with Francine Lacqua. "Nevertheless we do expect to see 10-year yields moving higher through the course of next year. We're in that normalization phase of monetary policy and as a result of that we're going to see long yields certainly move higher."

The rate on U.S. 10-year notes may climb as much as 100 basis points in the next year, Wilson said.

To contact the reporters on this story: Mariko Ishikawa in Tokyo at This email address is being protected from spambots. You need JavaScript enabled to view it. ; Lucy Meakin in London at This email address is being protected from spambots. You need JavaScript enabled to view it.

To contact the editor responsible for this story: Paul Dobson at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Contributing Editors

  • adrian muller has conducted seminars for the chicago board of trade, including a key series in 1999 which cautioned about a top in the equity markets (see his article “top experts and statistics on the dow”). adrian muller has appeared on cable tv financial programs with analysis on the futures markets and equity market directional forecasts. he has been quoted in barron's, the wall street journal, and futures magazine.

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