Treasuries Decline on Concern Fed to Lift Rates Amid Debt Sales

Nov. 8 (Bloomberg) -- U.S. 10-year notes fell in Asia as traders prepared to bid for $51 billion of debt being sold this week and on expectations the Federal Reserve will raise its key interest rate by a quarter percentage point in two days.

Notes had the biggest decline since July on Nov. 5 after the government said the economy added the most jobs last month since March. The surge in job creation raised speculation the central bank will boost its target rate at meetings Nov. 10 and Dec. 14.

"Treasuries could go even lower with the Fed expected to raise interest rates at least once more this year," said Hidetaka Namiki, head bond trader at the Tokyo unit of Banc of America Securities LLC, one of 22 primary U.S. government securities dealers that trade directly with the Federal Reserve Bank of New York.

The 4 1/4 percent note maturing August 2014 fell 3/32, or 94 cents per $1,000 face amount, to 100 15/32 as of 11:45 a.m. in Singapore, according to New York-based bond broker Cantor Fitzgerald LP. The note's yield rose 1 basis point to 4.19 percent. A basis point is 0.01 percentage point.

Ten-year yields may rise to 4.25 percent in coming weeks, Namiki said.

A Ried, Thunberg & Co. survey showed Treasury investors are the most bearish since Sept. 24. Its index on the outlook for the 10-year note on Nov. 5 declined to 39 from 41. A reading below 50 shows investors expect the 10-year note to fall by year-end. The 33 international investors polled by the Jersey City, New Jersey- based bond research firm manage $1.3 trillion.

Three Auctions

The Treasury will auction $22 billion in three-year notes today, $15 billion in five-year debt tomorrow, and $14 billion in 10-year securities on Nov. 10. The debt sales will raise $3 billion in cash and the balance will pay off maturing debt.

The 10-year yield rose to 4.25 percent on Nov. 5, the highest in almost a month after the payrolls report. Yields on three- and five-year notes also gained after the jobs numbers.

"All three auctions this week should go reasonably well given the recent gain in yields," Namiki said.

The Fed raised its target for overnight loans between banks, the federal funds rate, by a quarter percentage point at each of its past three meetings, to 1.75 percent from 1 percent. Policy makers will probably lift the rate to 2 percent at this month's meeting, all 58 economists surveyed by Bloomberg News said.

Traders increased bets for the Fed to raise rates on Dec. 14 after the Labor Department said employers added 337,000 workers in October, almost twice the number forecast by economists.

Similar Language

"With the jobs number coming in much better than expected and the refunding this week, it doesn't look good for Treasuries in the short term," said Kazuyuki Takigawa, who helps oversee the equivalent of about $908 million in debt at Fuji Investment Management Co., a unit of Mizuho Financial Group Inc., Japan's largest lender. "We expect a rate hike this week and for the Fed to keep to its `measured' pace of increases."

Fuji Investment favors European debt over U.S. notes because of a rising euro, and as the European Central Bank kept its key rate at a six-decade low of 2 percent to support recovery.

Increased hiring may not keep the economy from slowing in coming months as energy costs curb consumer spending, economists said. Crude oil prices reached a record $55.67 a barrel on Oct. 25.

U.S. retail sales probably rose 0.1 percent in October, after a 1.5 percent gain the month before, according to the median forecast of 50 economists in a Bloomberg News survey.

Relative Strength

Declines in the 10-year note may also be limited after the security's five-day relative-strength index, a gauge of momentum for gains or declines, fell to 19, according to data compiled by Bloomberg. A reading of 30 or below suggest the price may be poised to gain.

Fed funds futures show traders are pricing in about an 80 percent chance the central bank will push its target interest rate for overnight loans between banks to 2.25 percent by year-end. They assigned odds of less than 50 percent before the jobs report.

December federal funds futures, bets on what the rate targeted by the central bank will average in a particular month, were bid at a yield of 2.11 percent today.

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