Tags: rate | forecast | Goldman | auctions

Goldman Sachs Brings Forward Rate Forecast Before US Auctions

Monday, 07 July 2014 11:26 AM EDT

Goldman Sachs Group Inc. brought forward its forecast for the Federal Reserve to raise interest rates after U.S. employers added more jobs last month than forecast, sending five-year Treasurys lower for a fourth day.

The yield on the five-year note reached almost the highest level since April before trading little changed. The central bank will increase its benchmark interest-rate target in the third quarter of 2015, rather than the first three months of 2016, according to a report from Goldman Sachs. The bank joins JPMorgan Chase & Co. and Bank of Tokyo-Mitsubishi UFJ Ltd. in moving up its Fed estimates. The U.S. will sell $61 billion in notes and bonds this week.

“The five-year-and-in part of the curve will be the most sensitive,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The front end is weaker in anticipation of what the minutes may say, maybe they may come off a bit hawkish.” The yield curve refers to differences in yields between different maturities.

The U.S. five-year yield was little changed at 1.74 percent at 10:54 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note maturing in June 2019 traded at 99 14/32. The yield touched 1.78 percent on July 3, the highest since April 4.

The two-year yield rose one basis point to 0.52 percent and the 10-year yield fell two basis points to 2.62 percent after rising 10 basis points last week.

Yield Differences

The difference between the yields on five-year notes and 30-year bonds narrowed to 1.70 percentage points. It touched 1.67 percentage points on June 18, the narrowest since September 2009. During the period, it widened to as much as 3.11 percentage points in November 2010.

Traders see about a 78 percent chance officials will raise the key rate from near zero by September 2015, fed funds futures show. That’s up from 56 percent at the end of May.

Policy makers have kept their target for overnight lending between banks in a range of zero to 0.25 percent since December 2008. The central bank will publish the minutes of its June 17-18 meeting on July 9.

In the relative calm that is the market for U.S. Treasurys, a sense of unease over a vital cog in the financial system’s plumbing is beginning to rise.

Repo Fails

The Fed’s bond purchases combined with demand from banks to meet tightened regulatory requirements is making it harder for traders to easily borrow and lend certain desired securities in the $1.6 trillion-a-day market for repurchase agreements. That’s causing such trades to go uncompleted at some of the highest rates since the financial crisis.

Such failures to deliver Treasurys have averaged $65.6 billion a week this year, reaching as much as $197.6 billion in the week ended June 18, Fed data show. Uncompleted trades averaged $51.6 billion in 2013, and $28.8 billion in 2012, according to the Fed. In those cases, the borrower pays a 3 percent penalty.

This week’s note and bond sales will consist of $27 billion of three-year Treasurys tomorrow, $21 billion of 10-year notes on July 9 and $13 billion of 30-year debt on July 10.

The U.S. is recovering after contracting at a rate of as much as 8.3 percent at the worst of the recession that began in December 2007 and ended in June 2009.

Economic Outlook

“We remain quite confident that the U.S. economy is accelerating to an above-trend pace,” New York-based chief economist Jan Hatzius at Goldman Sachs wrote in a report yesterday. “The acceleration is most visible in the labor market. The inflation numbers have also surprised on the upside over the past few months.”

Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York, said last week he expected the first rate increase in March instead of June. JPMorgan Chase Chief U.S. Economist Michael Feroli brought forward his forecast last week by one quarter to the third quarter of 2015.

Goldman Sachs and JPMorgan are two of the 22 primary dealers that trade directly with the Fed.

The economy added 288,000 jobs in June, compared with the 215,000 projected by a Bloomberg News survey of analysts. The unemployment rate dropped to 6.1 percent, a six-year low.

Inflation Measure

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to as much as 2.29 percentage points last week, the most since Jan. 10. The rate, which was at 2.26 percentage points today, has averaged 2.2 percentage points during the past decade.

The Bloomberg U.S. Treasury Bond Index dropped 0.15 percent in the month ended July 4. The Bloomberg Global Developed Sovereign Bond Index gained 0.8 percent, reflecting trader expectations for Europe and Japan to keep borrowing costs at record lows.

The extra yield that 10-year Treasurys offer over their Group-of-Seven counterparts expanded one basis point to 74 basis points, the most since April 2010.

© Copyright 2024 Bloomberg News. All rights reserved.

Goldman Sachs Group Inc. brought forward its forecast for the Federal Reserve to raise interest rates after U.S. employers added more jobs last month than forecast, sending five-year Treasurys lower for a fourth day.
rate, forecast, Goldman, auctions
Monday, 07 July 2014 11:26 AM
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