Treasuries Decline as Retail Sales Surge Most in Three Years

Sept. 15 (Bloomberg) -- Treasury 10-year notes fell for a second day as sales at U.S. retailers surged in August by the most in three years, adding to signs the U.S. economy is emerging from its worst slump in over 50 years.

Longer-term U.S. debt led the declines as a separate report showed wholesale prices in the U.S. rose more than twice as much as forecast in August. The spread between two- and 10-year yields widened to 2.54 percentage points, from 2.44 percentage points at the end of last week, suggesting investors are demanding more to lend to the government for longer periods because of the risk that inflation will quicken.

“The perception is that the economy is improving,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “There is still a question of whether we are firmly on the road to recovery. I believe we are likely to experience a double dip.”

The yield on the 10-year note rose five basis points, or 0.05 percentage point, to 3.47 percent at 8:35 a.m. in New York according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 fell 13/32, or $4.06 per $1,000 face amount, to 101 9/32.

Retail sales climbed 2.7 percent, compared with the median forecast for a 1.9 percent gain in a Bloomberg survey. Prices paid to factories, farmers and other producers rose 1.7 percent, the fourth gain in five months. Excluding food and fuel, so- called core prices gained 0.2 percent, more than forecast.

Inflation Outlook

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, widened to 1.84 percentage points from 1.66 percentage points two weeks ago. It has averaged 2.19 percentage points over the past five years.

The Fed plans to buy notes due from February 2020 to February 2026 today, part of its plan to cap consumer borrowing costs. It will purchase Treasuries maturing from August 2010 to April 2011 tomorrow.

The central bank, which started the purchases in March, plans to end the $300 billion program in October. The Fed also authorized $1.45 trillion in purchases of mortgage-backed securities and other housing debt this year.

Lehman’s bankruptcy helped trigger a global financial crisis that led to $1.62 trillion in losses and writedowns by financial institutions and unprecedented government aid to the banking, insurance and auto industries. U.S. authorities have rescued, taken over or helped to sell Bear Stearns Cos., Merrill Lynch & Co., American International Group Inc., Fannie Mae, Freddie Mac and Citigroup Inc.

Yellen Comments

Federal Reserve Bank of San Francisco President Janet Yellen said a “tepid” recovery may cause inflation to slow.

“We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation,” Yellen said yesterday in a speech in San Francisco. The Fed’s moves “appear to be helping,” while the extent of their impact is “highly uncertain.”

Credit-market yields indicate the central bank is accomplished its goal.

The London interbank offered rate, or Libor, for three- month dollar loans fell to 0.293 percent. It was as high as 4.82 percent in October.

The Libor-OIS spread, a gauge of bank reluctance to lend, narrowed one basis point to 11 basis points today, the average level in the five years before the credit crisis began.

U.S. 30-year fixed mortgage rates declined to 5.23 percent from this year’s high of 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida.

‘Turn For Better’

Merrill Lynch’s U.S. Corporate & High Yield Master index yields 3.65 percentage points more than Treasuries, narrowing from 8.04 percentage points at the end of 2008.

Signs of recovery in the U.S. economy have helped send Treasuries down 3 percent this year, the Merrill indexes show. German government bonds returned 1.4 percent and Japanese securities gained 0.5 percent, according to the indexes.

“As long as the economy continues to improve, that should push yields higher,” said Peter Jolly, the Sydney-based head of market research for the investment-banking unit of National Australia Bank Ltd., the nation’s largest lender. “We are seeing a turn for the better in the economic numbers.”

Ten-year yields will rise to 3.7 percent by year-end, Jolly said. A Bloomberg survey of banks and securities companies projects 3.69 percent, with the most recent forecasts given the heaviest weightings.

Consumer Prices

A report tomorrow will show consumer prices rose 0.3 percent last month, after being unchanged in July, according to another Bloomberg survey.

Inflation won’t be a problem for the next six months though it may pick up after that, said Kei Katayama, who oversees $1.6 billion of non-yen debt in Tokyo as leader of the foreign fixed- income group at Daiwa SB Investments Ltd., a unit of Japan’s second-biggest investment bank.

“There will be more and more fear of inflation in the future,” he said. Katayama favors shorter maturities, which fall less in price if yields rise.