Tags: pimco | bonds | treasurys | interest rate

Pimco Sees Rate Increase as Treasurys' 2014 Rally Ebbed in June

Tuesday, 01 July 2014 07:23 AM

Pacific Investment Management Co. Chief Economist Paul McCulley said the Federal Reserve will raise interest rates in about a year as Treasurys ended June with a loss.

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 improves. Fed Bank of San Francisco President John Williams said data are “consistent” with an interest-rate increase in the second half of 2015.

Economists predict a U.S. report this week will show employers added more than 200,000 jobs for a fifth month. Chinese manufacturing expanded in June at the fastest pace this year.

The benchmark 10-year yield was little changed at 2.55 percent at 9:43 a.m. London time, according to Bloomberg Bond Trader data. The figure compares with the average of 3.41 percent for the past decade. The price of the 2.5 percent note maturing in May 2024 was 99 5/8.

“Yields at these types of levels don’t really reflect the macro picture of a firmer activity story, stronger labor market, higher wages and somewhat higher inflation,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney.

The Bloomberg U.S. Treasury Bond Index 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.

Healing ‘Nicely’

“The economy is healing very nicely,” McCulley said in an interview 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 Treasurys 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.

Williams said 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. Recent data are “consistent with that,” he said.

Rate Forecasts

Traders see a 52.5 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 central bank’s target for overnight lending between banks has been a range of zero to 0.25 percent since 2008.

The Institute for Supply Management’s manufacturing index will show a pickup at U.S. factories in June, according to a Bloomberg News survey of economists before the report.

U.S. employers added 215,000 jobs last month, versus 217,000 in May, a separate survey shows before the Labor Department releases the data on July 3.

In China, the Purchasing Managers’ Index measuring manufacturing increased to 51 for 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 2.24 percentage points. The figure has risen from this year’s low of 2.10 in February and compares to the average for the past decade of 2.20.

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.

Kei Katayama, a money manager in Tokyo at Daiwa SB Investments Ltd., predicts 3.5 percent.

“We’re a bit cautious to be bullish before nonfarm payrolls” on July 3, he said. “The U.S. economy is in good shape.” Daiwa SB oversees the equivalent of $48.3 billion.

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Pacific Investment Management Co. Chief Economist Paul McCulley said the Federal Reserve will raise interest rates in about a year as Treasurys ended June with a loss.
pimco, bonds, treasurys, interest rate
Tuesday, 01 July 2014 07:23 AM
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