Treasuries Decline as Pimco, BlackRock See Rates Higher in Year

Washington (July 1)  Treasuries fell, extending last month’s drop, as Pacific Investment Management Co. predicted the Federal Reserve will raise interest rates in about a year, damping demand for the safest fixed-income assets.

Treasuries also slid as BlackRock Inc., the world’s biggest money manager, forecast the first increase in borrowing costs will come in the second quarter of 2015. While U.S. notes and bonds held a gain for the first half of 2014, analysts are sticking to forecasts for declines as the world’s biggest economy gathers pace. Fed Bank of San Francisco President John Williams said data are “consistent” with an interest-rate increase in the second half of 2015.

“The Fed will have to raise interest rates at some point and the debate in the market at this point is when that will be,” said Luca Jellinek, head of European rates strategy at Credit Agricole SA’s corporate and investment banking unit in London. “One may argue that the economic picture is still mixed and rates may stay low for longer, but the risk of Treasury yields rising is greater than them falling.”

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.55 percent at 7:45 a.m. New York time, according to Bloomberg Bond Trader data. The figure compares with the average of 3.41 percent for the past decade. The 2.5 percent note maturing in May 2024 fell 6/32, or $1.88 per $1,000 face amount, to 99 17/32.

Yield Forecast

The Bloomberg U.S. Treasury Bond Index (BUSY) fell 0.1 percent in June. It gained 3.3 percent for the first half of 2014, reflecting a contraction in the economy from January through March.

Treasury 10-year yields will advance to 3.12 percent by Dec. 31, according to a Bloomberg survey of economists with the most recent forecasts given the heaviest weighting.

“The economy is healing very nicely,” McCulley said in an interview yesterday with Trish Regan on the “Street Smart” Bloomberg Television program. “I think the Fed will be hiking probably about a year from now, give or take a few months either way.” Pimco, based in Newport Beach, California, manages the $228.9 billion Total Return Fund, the world’s biggest bond fund.

Pimco raised its holdings of Treasuries and government-related debt in May to half the flagship fund’s total, data on the company’s website showed. The fund gained 0.4 percent in the past month after facing record redemptions and trailing 58 percent of peers during the past 12 months, according to data compiled by Bloomberg.

Fed Rate

Williams said yesterday that as long as the economy performs the way he expects it to, he forecasts the Fed will increase the main interest rate during the second half of next year.

Traders see about a 53 percent chance the central bank will raise its benchmark rate to at least 0.5 percent by July next year, up from 43.2 percent odds at the end of May, Fed Funds Futures show.

The Fed rate will probably be increased in the second quarter of next year, Stephen Cohen, BlackRock chief investment strategist for international fixed income, said in London today. The company’s view is not far from consensus and there would need to be a big improvement in U.S. economic data to change the market’s view, Cohen said.

Yield Curve

The Treasury yield curve will steepen as data improves and consumer prices rise, he said at a media briefing. The yield curve is a chart showing rates on bonds of different maturities.

The central bank’s target for overnight lending between banks has been a range of zero to 0.25 percent since 2008.

A U.S. report this week will show employers added more than 200,000 jobs for a fifth month, according to analysts in a Bloomberg survey. The Institute for Supply Management’s manufacturing index will show a pickup at U.S. factories in June, a separate survey shows before the report today.

In China, the purchasing managers index measuring manufacturing increased to 51 in June, the highest level since December, according to the National Bureau of Statistics and the China Federation of Logistics and Purchasing. A private manufacturing index from HSBC Holdings Plc and Markit Economics also climbed to the most this year.

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.25 percentage points. The figure has risen from this year’s low of 2.10 in February and compares with the average for the past decade of 2.20.

Source: Bloomberg