Treasury Yields Rise to Highest in 5 Years on Greenspan Warning

Treasury Yields Rise to Highest in 5 Years on Greenspan Warning
By Daniel Kruger and Elizabeth Stanton

June 12 (Bloomberg) — Yields on 10-year Treasury notes climbed to the highest in five years as former Federal Reserve Chairman Alan Greenspan predicted an increase in benchmark yields and greater premiums on emerging-market debt.

“The moment he made that comment the market fell apart,” said Irene Tse, co-head of U.S. interest-rates trading at Goldman, Sachs & Co. in New York.

Ten-year note yields climbed as high as 5.272 percent, surpassing the Fed’s target rate for overnight loans since June 28 2006, the day before the central bank ended its series of 17 consecutive increases over two years at 5.25 percent.

The yield on the benchmark 10-year note rose to 5.257 percent, an increase of 9 basis points, or 0.09 percentage point, at 4:04 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent note due May 2017 fell 22/32, or $6.88 per $1,000 face amount, to 94 6/32. The yield reached 5.295 percent on May 15, 2002. Bond yields move inversely to prices.

Referring to historically low premiums on emerging-market debt, Greenspan said “it ain’t going to continue that way. And indeed, all the spreads you are looking at, including your spreads relative to the 10-year are going to start to open up and the 10-year is going to be moving as well.”

“So I’d suggest someone out there is not going to be as happy as we are today,” Greenspan said at an event hosted by the Commercial Mortgage Securities Association in New York.

Inflation Concern

Treasuries slumped earlier after reports in China and Japan showed consumer and producer prices rising, while the head of the U.K. central bank signaled borrowing costs may need to rise to keep inflation from accelerating. The U.S. also sold $8 billion in 10-year notes at higher-than-forecast yields.

“In these sell-offs, whether domestically or the central banks, nobody’s coming in and buying,” said James Sarni, senior managing partner at Payden & Rygel in Los Angeles, which manages $54 billion. “We’d just rather not be in the way.”

The 10-year notes sold at a yield of 5.23 percent compared with the forecast of 5.223 percent by eight bond-trading firms surveyed by Bloomberg News.

The securities, which mature in May 2017, yielded 5.223 percent in pre-auction trading. Ten-year notes hadn’t drawn a yield higher than 5.19 percent in an auction since November 2000.

The auction was a reopening, meaning that the notes sold will pay interest at the same rate and mature on the same date as $13 billion of 10-year notes sold last month.

Yield Curve

Yields on 10-year notes exceed two-year securities by 19 basis points, the most since May 2006. At the start of the month, 10-year yields were lower than two-year securities by 2 basis points.

Volatility between the two securities has increased this month, according to Kevin Jackson, an interest rate strategist at RBC Capital Markets in New York, the securities arm of Canada’s biggest lender.

The average move this month in the spread, or difference in yield, between the two securities is 3.45 basis points per day, Jackson wrote in a note to clients. From January through May, the average daily movement in the spread was 1.67 basis points.

Ten-year note yields have increased 37 basis points this month on speculation accelerating economic growth will boost borrowing costs. Federal Reserve policy makers have kept interest rates at 5.25 percent during their last seven meetings.

`Changing Their Mind’

“Real yields are rising across the board and the U.S. has caught on,” said Brian Brennan, a portfolio manager who helps oversee $11 billion in fixed income at T. Rowe Price Group Inc. in Baltimore. “You have some big players in the market changing their mind” about Fed monetary policy.

Goldman and Merrill Lynch & Co., which predicted the Fed would reduce its target rate for overnight loans between banks this year three or more times, abandoned their forecasts last week.

Options prices on the December fed funds futures contract as of yesterday showed traders see a 44 percent chance the central bank will raise its benchmark interest rate a quarter-percentage point to 5.5 percent by the end of the year. A month ago, there were no expectations of a rate increase.

“The U.S. market is part of a global move to higher rates,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “The momentum has clearly turned negative in the bond market globally.”

`Global Move’

China’s inflation accelerated at the fastest pace in more than two years during May, increasing the likelihood that the central bank will lift rates. The consumer price index reached 3.4 percent in the 12 months through May, the highest since 3.9 percent in February 2005.

Bank of England Governor Mervyn King signaled U.K. interest rates may have to rise from a six-year high as inflation pressures show little sign of abating.

“The Monetary Policy Committee will be watching closely indicators of capacity pressures, pricing intentions and inflation expectations,” King said in a speech to business executives in Cardiff, Wales, late yesterday. “If these indicators remain elevated, the MPC may need to take further action.”

Retail Sales

U.S. reports on retail sales and inflation this week will probably signal the economy is rebounding and price gains are quickening, according to Bloomberg surveys.

The U.S. government tomorrow may say retail sales rose 0.6 percent last month after falling 0.2 percent in April, according to economists surveyed by Bloomberg News. A separate report on June 14 will probably show producer prices, excluding food and energy costs, rose 0.2 percent in May, after staying flat the month before, another survey showed.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net ; Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: June 12, 2007 16:07 EDT

I just can’t wait until the Fed raises the rates so that all this volatile and panicked selling can come to an end just before that long-predicted correction trigged by the Chinese markets assuming the average investor doesn’t already create that much-hyped correction from all this apprehension over the revised rates.  Sometimes Alan Greenspan needs to just shut the fuck up and realise that he is no longer chairman of the United States Federal Reserve.

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