BL: Treasuries Tumble After Bernanke Fans Speculation Rates to Rise
By Wes Goodman
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June 10 (Bloomberg) -- Treasuries fell, driving two-year yields up half a percentage point in two days, after Federal Reserve Chairman Ben S. Bernanke pledged to ``strongly resist'' any waning of public confidence in stable prices.
Two-year note yields approached the highest this year after Bernanke said the risk of a ``substantial downturn'' in U.S. economic growth has diminished, prompting traders to increase bets that policy makers will raise interest rates. The trading room at ICAP Australia Ltd. in Sydney erupted in noise after the comments, said Matthew Johnson, the firm's senior economist.
``The Fed is going to keep reminding us that they are worried about inflation,'' Johnson said. ``Bids disappeared for a while. Treasuries are still a sell.''
The two-year note yield rose 22 basis points to 2.93 percent as of 1:31 p.m. in Tokyo, according to bond broker BGCantor Market Data. The price of the 2.625 percent security due in May 2010 fell 13/32, or $4.06 per $1,000 face amount, to 99 13/32. A basis point is 0.01 percentage point.
Two-year rates, among the most sensitive to changes in Fed borrowing costs, may advance to 3 percent this week, Johnson said. The high so far this year was 3.10 percent on Jan. 2. Ten- year rates climbed 5 basis points to 4.06 percent.
Asian stocks and bonds slumped on concern a Fed rate increase will drive global borrowing costs higher. The MSCI Asia-Pacific Index of regional stocks fell 2.1 percent. Japan's five-year bonds slid the most in six weeks, sending their yields up 13.5 basis points to 1.425 percent. The dollar rallied to a three-month high of 106.84 against the yen.
Rate Bets
Futures on the Chicago Board of Trade show an 88 percent chance the Fed will raise its 2 percent target for overnight lending between banks at least a quarter point by December, rising from 62 percent the previous day. A month ago, most of the bets were for no change in rates this year.
The slump in Treasuries surprised economists, who predicted two-year yields would end this month at 2.35 percent, according to the median of 48 estimates in a Bloomberg News survey. The most recent predictions are given the heaviest weightings.
``The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,'' Bernanke said yesterday in a speech to a Boston Fed conference. ``The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.''
`Crushed'
The extra yield that two-year notes offer over the Fed's target interest rate widened to 92 basis points, the most since April 2005.
``Treasuries have gotten crushed,'' said Kenny Borowicz, a bond-futures broker at MF Global Singapore Ltd., part of the world's largest broker of exchange-traded futures and options contracts.
The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes widened to 2.58 percentage points from 2.45 percentage points a week ago. The figure reflects the inflation rate that traders expect for the next decade.
``Treasuries have entered `buy' territory,'' said Adam Donaldson, head of debt research at Commonwealth Bank of Australia in Sydney, the nation's second-largest lender. ``Pressure from inflation and the economic growth slowdown will bear down on equity markets and investors will still shift asset classes to safety.''
Fed officials have cut their benchmark lending rate from 5.25 percent in September to keep a U.S. housing recession and losses from the credit markets from throwing the economy into a recession.
`Complicated Balance'
The Fed faces a ``complicated balance'' of lowering interest rates to spur growth ``without taking too much risk that underlying inflation is going to accelerate over time,'' New York Fed Bank President Timothy Geithner said yesterday after a speech in New York.
``Treasuries will keep falling,'' said Mitsuo Masuda, a manager in Tokyo at the foreign bond section of Sumitomo Life, who helps oversee the equivalent of $28.1 billion in non-yen debt. ``The Fed will raise rates once or twice this year.''
Sumitomo plans to shift some Treasury holdings to euro- denominated bonds later in 2008, he said.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
Last Updated: June 10, 2008 00:36 EDT
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