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Treasuries Head for First Monthly Loss This Year on Fed Outlook

March 28 (Bloomberg) -- Treasuries were poised for their first monthly loss this year before a government report that analysts said will show consumer spending, which accounts for about 70 percent of the U.S. economy, is increasing.

Shorter-term borrowing costs rose as traders speculated growth will be enough to prompt the Federal Reserve to boost interest rates in 2015. The difference between five- and 30-year yields shrank to as little as 1.79 percentage points this week, the least since 2009. Fed Bank of Chicago President Charles Evans said the central bank will probably raise interest rates in the second half of next year. The central bank has trimmed bond purchases at each of its past three meetings.

“Unless there is a sharp slowdown in the U.S. economy, which is unlikely at this point, the Fed will continue with this pace of tapering,” said Axel Botte, a Paris-based strategist at Natixis Asset Management. “There is scope for yields to go up somewhat. The 10-year yields may push towards the 3 percent level by the end of June.”

The benchmark 10-year yield was little changed today at 2.70 percent at 7:04 a.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.75 percent note due in February 2024 was 100 15/32. The yield has averaged 3.46 percent during the past decade.

Treasuries handed investors a loss of 0.1 percent in March, based on the Bloomberg U.S. Treasury Bond Index, set for their first monthly decline since December. The Bloomberg Global Developed Sovereign Bond Index is little changed this month. It has risen 3 percent this year, the best quarterly performance in almost three years.

‘Bearish Market’

Wontark Doh, head of overseas fixed-income investment in Seoul at Samsung Asset Management Co., which manages the equivalent of $106 billion, said he’d consider buying Treasuries if the 10-year yield rises to 2.80 percent or 2.90 percent.

“There’s more probability of a bearish market in Treasuries,” he said. Samsung Asset Management is South Korea’s largest private bond investor.

U.S. personal spending rose 0.3 percent in February, following a 0.4 percent gain in January, according to a Bloomberg News survey of economists before the Commerce Department report today. Personal income also increased 0.3 percent, based on the responses.

The report will also contain the Fed’s preferred inflation measure, which slowed to a year-on-year rate of 0.9 percent from 1.2 percent in January, according to the survey. The figure has been below the Fed’s 2 percent target for almost two years.

Consumer Confidence

Thomson Reuters/University of Michigan will confirm a drop in consumer confidence for March after reporting the decline on a preliminary basis two weeks ago, a separate survey shows.

Primary dealers had a net position of negative $5.2 billion in coupon-bearing Treasuries in the week ended March 19, according to a report yesterday by Ward McCarthy and Thomas Simons at Jefferies LLC in New York. It was the first net short position since September 2011, according to the report. Jefferies is one of the 22 primary dealers, companies that underwrite the U.S. debt.

While Treasuries may fall later this year, there may be a rally at the start of April, said Weihan Chen, a bond trader at Hontai Life Insurance Co. in Taipei.

Some investors may buy as the month and the first quarter close to put the bonds and notes sold this year into their portfolios, Chen said. A 3.3 percent decline in new home sales reported earlier this week shows some areas of the economy are still “disappointing,” he said.

“I’m bullish in the short term,” he said, forecasting benchmark 10-year yields will fall to 2.60 percent in the first half of next week.

Inflation may quicken, the Fed’s Evans said.

“I do tend to think inflation’s going to pick up and that will be the reason why we ultimately raise rates,” Evans, who doesn’t vote on policy this year, said today in a Bloomberg Television interview with Betty Liu in Hong Kong. “My own take is it’s most likely to be in the second half of 2015. If I had my druthers, I’d wait a little bit longer than that.”

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