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Treasuries Extend Biggest Weekly Loss in 8 Months Amid Growth

Published: March 16, 2012 | 9:59 am
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Treasury (YCGT0025) 10-year notes extended their biggest weekly drop in eight months before U.S. reports that economists said will show consumer prices and factory output increased, damping demand for the safest assets.

Thirty-year yields approached the highest level since September as a gauge of the inflation outlook rose for an eighth day, reducing the appeal of the fixed income from bonds. Ten- year notes dropped for an eighth session after Federal Reserve Bank of Richmond President Jeffrey Lacker said the U.S. central bank would probably need to raise interest rates next year.

“If we see industrial production above expectations then that could add to the positive market sentiment” and be negative for Treasuries, said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “A combination of a series of quite good economic data and the Fed’s statement has caused Treasury yields to break out of their range and increase this week.”

The 10-year yield rose three basis points, or 0.03 percentage point, to 2.31 percent, at 8:51 a.m. London time, according to Bloomberg Bond Trader prices. The 2 percent note due February 2022 dropped 7/32, or $2.19 per $1,000 face amount, to 97 9/32. The yield rose 28 basis points this week, the most since the period ended July 1.

Yields may increase another 10 to 15 basis points in the next two weeks, Purps said. While the 10-year rate has climbed 43 basis points this year it is still below last year’s high of 3.77 percent set on Feb. 9, and the average over the past 10 years of 3.87 percent.

Thirty-year yields increased two basis points to 3.43 percent after rising to 3.49 percent yesterday, the highest level since Sept. 2.

‘Moderate Pace’
“The economy is expanding at a moderate pace” and inflation is close to the Fed’s 2 percent objective, Lacker said in a statement on the Richmond Fed’s website. “My current assessment is that an increase in interest rates is likely to be necessary some time in 2013.”

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, climbed one basis point to 2.4 percentage points after reaching 2.41 percentage points, the most since Aug. 2. The average over the past decade is 2.14 percentage points.

The consumer-price index rose 0.4 percent in February, the most in 10 months, after advancing 0.2 percent in January, according to a Bloomberg News survey of economists before today’s report. Economists forecast industrial production gained 0.4 percent in February, after being unchanged the previous month, a separate Bloomberg survey showed.

The Fed is scheduled to sell as much as $8.75 billion of Treasuries maturing in February 2014 to May 2014 as part of its so-called Operation Twist program to replace holdings of shorter-term securities with longer-term bonds.

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