Treasuries Fall while IP Drop Seen Leaving Fed Undeterred

For the first time in three days, Treasuries fell, this as a report showing that US industrial production declined unexpectedly last month failed to derail expectations set by investors for higher interest rates next year.

After a report showed gross domestic product for Japan contracted an annualized 1.6% in the three months through September, the 10-year yield hit its lowest in a week. Meanwhile, the Federal Reserve showed the US industrial output dropped 0.1%. As stated by Federal Governor Jerome Powell, there is an expectation that the US central bank will increase interest rates in 2015 although the exact timing will depend on the economy recovery pace.

Earlier, the Japanese news weighed on the market although risk sentiment improved based on the US economic data being decent, this according to Adrian Miller, director of fixed-income strategies at New York-based GMP Securities, LLC.

The benchmark for US 10-year yields climbed two basis points or 0.02% point to 2.34%. Prior, the yield hit 2.28%, the least since November 10.

As far as job creation, Powell said that this year things are on track to be the best since 1999. Therefore, increasing interest rates sometime mid-2015 makes perfect sense. Then for the federal funds rate, the Fed has maintained the target, with banks charging one another on overnight loans anywhere from 0% to 0.25% dating back to December 2008.

Hiroki Shimazu, senior market economist at SMBC Nikko Securities in Tokyo said he sees an economy that continues to recover. The Federal Reserve is still thinking about increasing rates, perhaps not immediately but sometime in 2015. The benefit he said is that Treasures will continue to attract funds from abroad.

At their October meeting, US policy makers retained a pledge whereby interest rates would remain low, at least for a considerable period of time after the bond-buying program has ended. However, exact timing will be based on progress of the Fed’s goals of hitting 2% inflation and maximum employment.

In a statement from Thomas Simons, government-debt economist with Jefferies LLC in New York and among the 22 primary dealers obligated to bid US debt sales, this week’s focus will be on the FOMC minutes. He added that Treasure 10-year notes should stay between 2.20% and 2.40%, since the message coming from the Fed will probably remain confusing.

Currently, Japan is the latest nation showing signs of weakness, this as the economy in the US expands and generates greater demand for Treasuries, this as yields in Europe and Japan fall while the value of the dollar increases.

Mario Draghi, president of European Central Bank cited government-bond buying as a policy tool that could be used by officials to stimulate the economy if signs develop that things are worsening. However, there are other unconventional measures that might involve various assets being purchased, one being sovereign bonds.

The ECB’s balance sheet will be boosted successfully by Draghi, pushing it back toward $3.74 trillion although some qualms on quantitative easing by policy makers will have to be overridden.

Gennadiy Goldberg who works as a fixed income strategist with TD Securities, LLC wrote that there are ongoing questions pertaining to the world economy’s ability to sustain growth momentum being likely to keep providing a tailwind to Treasury bulls as uncertainty stays at an elevated level.

A return of 19% in 2014 was returned for US government securities due within the next 10 years and longer. As such, this is the largest return as far as dollar, among 144 bond indexes worldwide tracked by the European Federation of Financial Analysts Societies and Bloomberg.

Today, data revealed that manufacturing in the state of New York fell short of November’s forecast. According to a survey conducted by Bloomberg, US industrial production was expected to climb 0.2% last month.

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