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U.S. Treasuries Decline after Durable Goods Orders Increase
Michael McDonald & Daniel Kruger in New York


Jan. 26 (Bloomberg) -- U.S. 10-year Treasuries fell for the fourth straight day, the longest slump since the start of November, after government reports showed orders for durable goods and jobless claims were stronger than forecast.

The declines pushed yields on 10-year notes above 4.5 percent for the first time since Dec. 15 and less than a week before the Federal Reserve is likely to increase its interest- rate target a quarter percentage point from 4.25 percent. Evidence economic growth is holding up may bolster speculation the central bank will raise rates again in March.

``There's at least one, maybe more Fed moves to go'' after next week, said David Coard, manager of fixed income sales and trading with securities firm Williams Capital Group in New York. ``The market is getting set up'' for higher yields, he said.

The yield on the benchmark 10-year note rose 4 basis points, or 0.04 percentage point, to 4.52 percent at 10:38 a.m. in New York, according to broker Cantor Fitzgerald LP. The yield, which moves inversely to prices, is the highest since Dec. 14. The price of the 4 1/2 percent note due in November 2015 dropped more than 1/4, or $2.50 per $1,000 face amount, to 99 27/32.

Treasuries yesterday tumbled the most since November after a government auction of $22 billion in two-year notes attracted the weakest demand since April based on the amount of bids relative to the amount sold. The last time 10-year yields were below the Fed's target rate was in 2001, when the central bank was cutting borrowing costs.

Orders, Claims

The Commerce Department said orders for durable goods rose 1.3 percent last month, after increasing 5.4 percent in November. A gain of 1 percent was expected, according to the median estimate of 68 economists in a Bloomberg survey. November's number was revised from 4.4 percent.

The data ``reinforced the perception that already existed'' about the outlook for the Fed, said John Canavan, a debt strategist with economic consulting firm Stone & McCarthy Research in Skillman, New Jersey. ``You have a market that's turned more bearish.''

A Labor Department report today showed first-time claims for unemployment benefits rose to 283,000 in the week ended Jan. 21, up from 272,000 a week earlier. A reading of 300,000 was forecast.

Traders expect the Fed to lift its overnight rate to 4.5 percent on Jan. 31, after 13 increases from 1 percent in June 2004, to keep inflation contained, interest-rate futures show. There is about a 75 percent chance of an increase to 4.75 percent on March 28, up from just over 50 percent last week.

Key Levels

Declines in Treasuries accelerated this week after the 10- year note's price fell below 100 3/4. That level represented a 62 percent reversal of the note's rise from its low this year on Jan. 11 to its high on Jan. 18.

Analysts and investors who make forecasts based on trading patterns consider reversals of certain magnitudes, including 62 percent, as likely places for rallies or slumps to either stall or extend. In another negative signal for the market, 10-year yields rose above 4.50 percent, a level considered an area of ``support,'' or where buy orders were clustered.

The 4.50 percent yield was ``a key level we've gone through,'' said Sharon Lee Stark, chief fixed-income strategist at brokerage firm Stifel Nicolaus & Co. in Baltimore. ``That gives you an idea of the type of negative momentum right now.''

Growth Report

Declines may be tempered before a Commerce Department report tomorrow that may show economic growth in the fourth quarter slowed to 2.8 percent, according to the median forecast of 71 economists in a Bloomberg survey. The rate would be the weakest since the first quarter of 2003 and follows a 4.1 percent annual rate in the third quarter.

Consumer spending, which accounts for about 70 percent of the economy, probably grew at a 0.4 percent annual pace in the fourth quarter, the slowest since the last three months of 1991, according to a Bloomberg survey. Spending grew 4.1 percent in the third quarter.

``One more rate increase may be enough for the U.S. economy,'' Akira Takei, who manages $9.1 billion of global bonds at Fuji Investment Management Co. in Tokyo, said before today's reports. The Fed may cut borrowing costs this year and the 10- year yield may fall to 3.8 percent, he said.

Yields on Treasury Inflation Protected Securities, or TIPS, which are intended to provide a hedge against rising consumer prices, show expectations for inflation have declined.

The gap in yields between Treasuries and TIPS due in 10 years narrowed to 2.43 percentage points, from 2.54 percentage points three months ago. The difference represents the average rate of inflation traders expect over the life of the securities.

Supply, Deficit

Investors will contend with more supply of Treasuries in the next few weeks as the government pays for the rebuilding from Hurricanes Katrina and Rita. The Congressional Budget Office said today that the deficit will widen to $337 billion in fiscal 2006 ending in September, from $319 billion last year.

The Treasury will announce on Feb. 1 the size of its quarterly sales of three- and 10-year notes and 30-year bonds scheduled for the following week. They may amount to $48 billion, according to an estimate by Wrightson ICAP, the independent research unit of ICAP Plc, the largest inter-dealer broker.

``At this juncture, it would be difficult to attract strong demand, especially for the 30-year maturity,'' said Hidehiko Maejima, a bond strategist at BNP Paribas Securities Japan Ltd. in Tokyo. ``It will trigger higher yields in 10-year securities.''

Sales of $20 billion of 20-year TIPS on Jan. 25, $9 billion of 10-year TIPS on Jan. 12, and $13 billion of five-year notes on Jan. 11 all drew less demand from investors compared with their previous sales.

Treasuries were little changed earlier after Chinese central bank governor Zhou Xiaochuan said Chinese consumers need to save less and the Chinese government may need to consider how this impacts Treasuries. China is the second-biggest holder of U.S. government debt, after Japan, with holdings of $249.8 billion.

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