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U.S. 10-Year Treasury Notes May Decline on Outlook for Production Growth

U.S. 10-Year Treasury Notes May Decline on Outlook for Production Growth

March 16 (Bloomberg) -- U.S. 10-year Treasury yields held near a seven-month high in Europe on expectations a central bank report today will show industrial production gained last month as consumer spending increased.

Treasuries fell yesterday and yields rose as the Commerce Department said retail sales gained for a third month. The release sparked concern increased spending may spur inflation and prompt the Federal Reserve to lift interest rates more than most economists expect this year.

``The Fed is more confident of growth and at the same time has indicated there are price pressures in the economy,'' said Masahiro Nishida, an investor in Tokyo at Kokusai Asset Management Co., which has the equivalent of about $44 billion in mutual funds. ``Yields have not hit a ceiling.''

The benchmark 4 percent note due February 2015 was little changed at 95 23/32 as of 5:05 a.m. in London, according to bond broker Cantor Fitzgerald LP. The yield fell 1 basis point, or 0.01 percentage point, to 4.54 percent.

Nishida said he cut the duration of his bond holdings, favoring bonds that won't fall as much when yields rise. Duration is a measurement of the sensitivity of a bond's price to changes in interest rates.

A Fed report today will probably show factories, mines and utilities increased production by 0.4 percent in February, after an unchanged reading in January, according to the median forecast of 71 economists polled by Bloomberg.

A Commerce Department report yesterday showed retail sales rose 0.5 percent in February, after rising a revised 0.3 percent a month earlier.

Highest Since July

Declines in Treasuries may be tempered by expectations some investors will add to their holdings after the 10-year yield rose to the highest since July.

The security's 14-day relative-strength index, a gauge of momentum for gains or declines, was 27 today, according to data compiled by Bloomberg. A reading of 30 or below suggests the price may be poised to rise.

``Treasuries are looking more attractive now than they were a few weeks ago,'' said Irene Cheung, head of Asian sovereign and foreign-exchange strategy at ABN Amro Bank in Singapore.

Interest rate futures contracts show traders and investors are raising expectations for how much the central bank will increase the target rate this year.

The Fed will raise the rate to 3.75 percent by Dec. 31, according to the median forecast of 66 economists polled by Bloomberg from March 1 to March 8.

Fed policy makers have raised the target rate for overnight lending between banks in six quarter-point increments since June to 2.5 percent.

Fed to Meet

They are likely to raise the rate another 25 basis points when they meet on March 22, according to all but eight of 92 economists surveyed by Bloomberg News. Seven of the eight economists expect the rate to be unchanged, while one economist expects a 50 basis point increase next week.

Investors will also be looking at the statement accompanying the Fed's rate decision to see if it keep its wording on the pace at which it plans to remove policy accommodation.

The central bank has used the word `measured' in statements about the pace at which it plans to lift the target rate since May.

``There's a fair chance the Fed will remove the measured language but would extensively qualify it and say they have every intention to stay the course,'' said Jan Lambregts, head of Asia Pacific research in the treasury department of Rabobank Singapore.

The yield on December Eurodollar futures contracts was 4.175 percent today and is up from 3.91 percent three weeks ago, according to Bloomberg data. The futures settle at a three-month lending rate that has averaged 21 basis points above the Fed's target over the past 10 years.


LINK: http://www.bloomberg.com/news/markets/bonds.html