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Old June 10th, 2013, 12:47 PM
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Treasuries Fall After S&P Revises Outlook of U.S.

By Daniel Kruger - Jun 10, 2013 11:04 AM ET
Treasuries fell, pushing 30-year (USGG30YR)bond yields to the highest in more than a year, after Standard & Poor’s boost in its outlook for the U.S. to stable from negative added to bets the Federal Reserve may slow monetary stimulus.
U.S. government securities were little changed earlier amid speculation about whether signs of economic growth may bolster the argument for the Fed to slow its $85 billion a month in bond purchases. Reports last week showed U.S. payrolls rose, while the jobless rate increased. Fed Bank of St. Louis PresidentJames Bullard said today inflation below the central bank’s target warrants prolonging asset purchases to spur growth.
“More positive news on the economy will be something that guys will say helps the Fed out with the case to start pulling back,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed.
The 30-year yield increased three basis points, or 0.03 percentage point, to 3.37 percent at 11:01 a.m. New York time, according to Bloomberg Bond Trader prices. It touched 3.38 percent, the highest since April 2012. The price of the 2.875 percent security due in May 2043 declined 18/32, or $5.63 per $1,000 face amount, to 90 25/32.
Yields on benchmark 10-year (USGG10YR) notes rose four basis points to 2.21 percent.
Treasuries declined after S&P said in a statement the U.S. has a less than one-in-three likelihood of a downgrade of its AA+ credit rating in the “near term” with the revision. The New York-based company said it sees “tentative improvements,”such as the deal U.S. lawmakers reached to resolve what became known as the fiscal cliff and through spending cuts in the Budget Control Act of 2011.
Six Weeks

Treasuries have fallen for six consecutive weeks, their longest run of losses since May 2009. The Fed will reduce its bond purchases to $65 billion a month at its Oct. 29-30 meeting, according to the median estimate in a Bloomberg survey of economists. The central bank currently buys $45 billion of Treasuries and $40 billion of mortgage securities each month to put downward pressure on borrowing costs.
The U.S. is scheduled to sell $66 billion in notes and bonds at three auctions this week, beginning with $32 billion in three-year debt tomorrow.
Demand for Treasuries at auction has slackened amid signs of improvement with the U.S. economy. Investors have bid $2.98 for each dollar of debt sold at the U.S. government’s $905 billion in Treasury notes and bonds sold at auction this year compared with of $3.15 set in 2012, according to Treasury data compiled by Bloomberg. The measure of demand, known as the bid-to-cover ratio, is still the fourth-highest since at least 1994, following a 3.04 ratio in 2011 and a 2.99 ration in 2010. The ratio was 2.50 in 2009.
Downside Surprise

The Fed’s Bullard said U.S. inflation “has surprised to the downside.” Price gains as measured by the personal consumption expenditures price index rose 0.7 percent in April from a year earlier, below the central bank’s 2 percent goal. The policy-setting Federal Open Market Committee meets next week.
While “labor market conditions have improved since last summer,” Bullard said in remarks prepared for a panel discussion in Montreal, “surprisingly low inflation readings may mean the committee can maintain its aggressive program over a longer time frame.”
Williams, Lockhart

San Francisco Fed President John Williams said last week a“modest adjustment downward” in the buying is possible as“early as this summer.” Atlanta Fed President Dennis Lockhartsaid “very mixed” economic data makes him “more cautious”about a near-term reduction in purchases.
The FOMC said May 1 it will continue buying bonds “until the outlook for the labor market has improved substantially.”
U.S. employers boosted payrolls by 175,000 jobs in May after a revised 149,000 gain in April, the Labor Department said June 7. The median forecast in a Bloomberg survey of economists was for an increase of 163,000. The jobless rate rose to 7.6 percent from 7.5 percent.
“It’s not about whether the Fed will taper; it is about when and how much, and that’s what the market will be analyzing,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “We’ll have a bit of a price discovery as we go into supply.”
Investor Cushion

For the first time since 2009, U.S. bond yields are rising at the same time inflation is slowing, providing a cushion for investors in Treasuries whether or not the Fed slows the pace of its debt purchases.
While 10-year yields reached 2.23 percent May 29, the highest since April 2012, the rise in April in the personal consumption expenditure deflator, the Fed’s preferred gauge of inflation, was the smallest increase since 2009. The yield gap between Treasury Inflation-Protected Securities, or TIPS, and non-indexed bonds show investors have cut their expectations for consumer price increases to the lowest level since July.
After losing 2 percent last month, the most since December 2009, according to Bank of America Merrill Lynch bond indexes, Treasuries are offering the highest real yields in more than two years. The last time yields rose while inflation slowed was four years ago, following President Barack Obama’s $787 billion stimulus plan. Yields later fell.
“We don’t think inflation is a big threat,” Andrew Wickham, head of U.K. and global fixed-income at Insight Investment Management Ltd., which oversees about $134 billion in bonds and currencies, said in a June 5 presentation in London.“It is very unlikely that we will see any major rise ininterest rates for Treasuries from here.”
To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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