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U.S. Treasuries Decline on Surge in March Consumer Confidence
Elizabeth Stanton, Michael McDonald in New York


March 28 (Bloomberg) -- U.S. Treasury securities fell as a surge in consumer confidence bolstered speculation the Federal Reserve will raise interest rates today and at least twice more this year.

The losses pushed note yields up toward the 4.75 percent level, where Fed policy makers are expected to set their benchmark rate today at 2:15 p.m. in Washington. The jump in U.S. consumer confidence exacerbated a sell-off that began earlier when business confidence in Germany, the world's third- biggest economy, rose to a 15-year high.

``The stronger consumer confidence, the more likely the Fed will keep hiking rates for longer,' said Alex Li, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of the 22 primary U.S. government securities dealers that trade with the Fed's New York branch. ``Yields have the potential to march higher in the coming months.'

The yield on the benchmark 10-year note rose about 4 basis points, or 0.04 percentage point, to 4.74 percent at 12:47 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent security due in February 2016 fell about 1/4, or $2.50 per $1,000 face amount, to 98 3/32. The 30- year bond yield rose about 4 basis points to 4.77 percent.

Confidence Rises

The New York-based Conference Board's consumer confidence index climbed to 107.2, the highest since May 2002, from a revised 102.7 in February. The level exceeded all 64 forecasts in a Bloomberg News survey.

Yields on two-year notes, more sensitive than longer- maturity debt to changes in the Fed's rate, rose about 1 basis point to 4.73 percent. Ten-year yields haven't closed even with or higher than two-year yields since March 20.

``The Treasury market had gotten to a level where it was comfortable going into today's meeting,' then European bond markets fell, said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York. ``That is forcing our market lower.'

The Ifo Institute's index of German business sentiment rose to 105.4, its highest since April 1991, from 103.4 in February. Analysts had expected a drop to 102.9, the median forecast in a Bloomberg survey.

Yields on German debt soared as traders raised bets the European Central Bank will boost its benchmark rate three more times this year, to 3.25 percent. Two-year German government bond yields rose 9 basis points to 3.23 percent, the highest since November 2002. The yield on the 10-year German bond increased 9 basis points to 3.72 percent, matching the highest in a year.

Growth `Surprise'

``Global economic growth continues to surprise on the upside and this German report adds fuels to the fire,' said Bernard Walschots, head of research at Rabobank Groep in Utrecht, the Netherlands. ``It's pushing a sell-off in bond markets around the globe.'

The jump in European bond yields narrowed the margins by which U.S. yields exceed German yields. For 10-year debt the gap shrank by about 5 basis points to 1.01 percentage points, the slimmest since March 20. The gap in two-year maturities shrank 7 basis points to 1.5 percentage points.

Traders and investors will examine the Fed statement announcing its decision on interest rates for clues to whether the central bank is likely to raise rates at its next meeting on May 10. The Fed has raised rates 14 straight times since June 2004.

``If you get an unchanged statement that will lead people to price in the next rate hike and maybe another one,' said Raymond Remy, head of fixed-income at Daiwa Securities America Inc. in New York, another primary dealer. ``It's hard to be a buyer of Treasury notes if the Fed is going to keep raising rates.'

Divided Survey

A Bloomberg survey of economists at the 22 largest bond trading firms last week found they were divided, with nine expecting a target rate of 4.75 percent at year-end and six forecasting a target of 5.25 percent or 5.5 percent.

The statement may not bolster either camp, said Mark Ficke, head of U.S. government bond trading in New York at BNP Paribas Securities Corp., also a primary dealer.

``The economic backdrop doesn't warrant a big change here,' he said.

Interest-rate futures show traders see about 80 percent odds the Fed will boost the rate to 5 percent at the next meeting on May 10.

Fed officials including Chairman Ben S. Bernanke last week suggested the central bank will keep raising rates. Yields on longer-term maturities are reflecting not an economic slowdown but expectations of low inflation, he said on March 20.

Ten-year yields are about 5 basis points above where they were when the Fed started raising rates and have held below those on two-year notes for six of the eight weeks since the Fed's last meeting on Jan. 31. Longer-term debt typically yields more than shorter-term debt to compensate investors for risks such as the potential for faster inflation.

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