More Americans than forecast filed first-time claims for unemployment insurance payments last week, indicating it will take time for the labor market to mend.
Applications for jobless benefits increased by 51,000 to 454,000 in the week ended Jan. 22, Labor Department figures showed today. Economists forecast 405,000 claims, according to the median estimate in a Bloomberg News survey. The number of people on unemployment benefit rolls rose, while those collecting extended payments fell.
A Labor Department official said snow in four southern states in previous weeks created a backlog of claims that were processed last week. While the economy has improved, it hasn’t been enough to reduce an unemployment rate that Federal Reserve policy makers said yesterday is too high and requires pressing ahead with a $600 billion stimulus plan.
“If claims drift higher, we’re just going to have to wait and see, tread water,” Julia Coronado, chief economist for North America at BNP Paribas in New York, said. “We’re creating enough jobs to keep the unemployment rate roughly steady and at a pace to keep the economy on track, but it’s not necessarily a picture of rapid improvement.”
Estimates in the Bloomberg News survey of 52 economists ranged from 375,000 to 428,000, after the Labor Department initially reported claims fell to 404,000 the prior week.
Futures on the Standard & Poor’s 500 Index expiring in March fell 0.2 percent to 1,291.70 at 8:47 a.m. in New York. The yield on the 10-year Treasury note, which moves inversely to price, rose to 3.44 percent from 3.42 percent late yesterday.
Winter Effects
The Labor Department official said winter weather in Alabama, Georgia, North Carolina and South Carolina in previous weeks kept people from filing claims. Those unemployed Americans ended up filing last week, boosting the claims number.
“In addition to seasonal volatility, we have this extra effect in the numbers,” the Labor Department official said as the figures were released.
The four-week moving average, a less-volatile measure, rose to 428,750 from 413,000.
The number of people continuing to collect jobless benefits increased by 94,000 in the week ended Jan. 15 to 3.99 million. Economists forecast the number would increase to 3.87 million.
The continuing claims figure does not include the number of workers receiving extended benefits under federal programs.
Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 98,000 to 4.62 million in the week ended Jan. 8.
President Barack Obama in December signed into law an $858 billion bill extending for two years tax cuts for all income levels. The measure also continues expanded jobless insurance benefits to the long-term unemployed for 13 months and reduces payroll taxes for workers by two percentage points this year.
Democrats, Republicans
“These steps, taken by Democrats and Republicans, will grow the economy and add to the more than one million private- sector jobs created last year,” Obama said this week during the State of the Union address.
The unemployment rate among people eligible for benefits, which tends to track the jobless rate, rose to 3.2 percent in the week ended Jan. 15, today’s report showed. Fifty states and territories reported a decrease in claims, while three had an increase. These data are reported with a one-week lag.
Initial jobless claims reflect weekly firings and tend to fall as job growth — measured by the monthly non-farm payrolls report — accelerates.
Economic expansion in the U.S. is “continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions,” the Federal Open Market Committee said yesterday in its statement after a two-day meeting in Washington.
Unemployment is too high to be consistent in the long run with policy makers’ congressional mandate of full employment, the Fed said, repeating that progress toward its objectives has been “disappointingly slow.”
The labor market gradually improved at the end of last year, with unemployment falling to 9.4 percent in December from 9.8 percent a month earlier, according to Labor Department figures released Jan. 7. The country added 103,000 jobs in December, fewer than economists forecast in a Bloomberg survey.
Company Workforce
Some companies have been shifting the composition of their workforce to meet consumer demand, which probably grew 4 percent in the final three months of last year, according to the median estimate of economists surveyed by Bloomberg before the Commerce Department’s first estimate of fourth-quarter growth tomorrow.
Lowe’s Cos., the second-biggest U.S. home-improvement retailer, said this week it plans to eliminate 1,700 middle- management jobs in stores as profit growth trails that of larger Home Depot Inc. At the same time, Mooresville, North Carolina- based Lowe’s plans to add 8,000 to 10,000 weekend sales positions to improve staffing at the chain’s busiest time of the week.
“Adding a third shift is a response to customer demand for heavy-duty pickups, which most people use to tow, haul and plow,” Mark Reuss, president of GM North America, said in the statement. “Equally importantly, it brings jobs and a needed economic boost to the Flint area.”
Reserve Bank of Australia Governor Glenn Stevens can glimpse the inflation threat he faces from the nation’s floods at the produce shop near his suburban Sydney home in Sylvania Waters.
Tomato prices soared 20 percent in the past week and bananas, grapes and sweet potatoes are up 10 percent, said Maurice Sorace, owner of Sylvania Best Fresh, who gets about a third of his fruit and vegetables from flood-ravaged Queensland state. “Prices will be higher in the next week” as the deluge drowns more crops and clogs roads, he said.
The crisis may force the RBA to accept higher inflation in coming months as the floods spur food and commodity costs and slow growth in a disaster zone the size of Egypt. Australian inflation-linked bonds yesterday rallied the most in more than a year as the damage, along with future rebuilding in a country already near full employment, risked stoking consumer prices.
“At a time when the economy does not have a lot of spare capacity and a mining and energy-investment boom is also expected over the next few years, the RBA will face an even greater challenge to manage medium-term inflation pressures,” said Paul Brennan, an economist at Citigroup Inc. in Sydney.
The river that bisects the Queensland state capital, Brisbane, burst its banks, threatening thousands of properties and inundating parts of the nation’s third-biggest city. A torrent of brown water filled with shattered pontoons, trees and boats broken from moorings, the Brisbane River is forecast to peak today.
Bigger Impact
“Now the floods are urban, much greater damage to infrastructure is likely,” Roland Randall, an economist at TD Securities Inc. in Singapore, said in a note to clients yesterday. “We have pushed out our expectation for the RBA to resume tightening monetary policy to April or May” from a previous call of March, he wrote.
As the water crests, investors are increasing bets that price gains will accelerate. The extra yield of Australian inflation-linked bonds maturing in five years compared with nominal five-year government debt — a gauge of the inflation investors expect over the period — yesterday reached an eight- month high of 2.92 percentage points.
The rain that closed coal mines and cut railways also drove the Australian dollar down to a one-month low versus its U.S. counterpart on concern the floods will slow growth.
Hit to GDP
The cost to the nation may total as much as A$13 billion ($12.9 billion), or 1 percent of gross domestic product, said Stephen Walters, chief economist for Australia at JPMorgan Chase & Co. in Sydney, who has changed his forecast for the next rate rise to May from February. RBA board member Warwick McKibbin said such a hit to GDP “is not out of the question,” the Sydney Morning Herald reported yesterday.
Much of the economic damage assessment is incomplete. The Port of Brisbane remained closed yesterday and all ships were directed out of the harbor, which lies 24 kilometers (15 miles) from the city’s central business district, as debris littered the waterway guaranteed payday loans.
Mining companies including Rio Tinto Group, BHP Billiton Ltd. and Xstrata Plc have deferred deliveries of coal, driving up the price for steelmaking and power coal. Thermal coal prices have already risen to the highest since September 2008.
Cattle Prices
Cattle prices in Australia, the second-largest beef exporter, jumped to near a record. The Eastern Young Cattle Indicator, which measures prices at sales, gained to A$4.108 per kilogram yesterday, reaching the highest level since October 2005, Tim McRae, economist at Sydney-based Meat & Livestock Australia said.
Once Stevens does resume raising rates, the rise in borrowing cost would pose an additional burden on farmers and homeowners with floating-rate debt, after the RBA already boosted rates faster than any Group of 20 nation since the end of the crisis.
Stevens has a mandate to keep inflation in a range of 2 percent to 3 percent. In July to September, the consumer price index rose at a quarterly pace of 0.7 percent. It may rise 1.2 percent in the first quarter of this year, according to the median of six estimates in a Bloomberg News survey, compared with a pre-flood estimate of 0.9 percent.
Inflation Outlook
The projected pace would be the fastest since the third quarter of 2008, when the RBA’s cash rate target was at 7.25 percent, compared with its current level of 4.75 percent.
GDP growth in the first three months this year will be half as high as the pre-flood forecast, at 0.4 percent, a survey of seven economists showed.
The reconstruction efforts may suffer from skill shortages already straining mining operations, threatening to push up wages for some workers.
Australian employers probably added 25,000 workers in December from a month earlier and the jobless rate likely declined to 5.1 percent from 5.2 percent, according to the median estimate of 17 economists surveyed by Bloomberg News before an employment report released today.
Bank of America Merrill Lynch economists said the RBA would resume raising rates “from the middle of the year, assuming that weather normalizes in about April.”
An entertainment company controlled by St. Louis Rams owner Stan Kroenke and a Canadian company have bought a 50-percent stake in cable’s World Fishing Network. Altitude Sports and Entertainment, a subsidiary of Denver-based Kroenke Sports Enterprises, partnered with Toronto-based Insight Sports to buy the network. U.S. operations will be based in Denver. Kroenke owns hockey’s Colorado Avalanche and basketball’s Denver Nuggets. He is also the controlling owner of the Rams. (Matthew Hathaway)
Stocks closed barely changed Tuesday amid light trading ahead of the New Year’s holiday.
The blue-chip Dow Jones industrial average finished slightly higher, though stocks had dipped earlier on disappointing consumer confidence and home prices reports.
The Dow edged up after Treasury prices fell in the wake of a weak bond auction in the afternoon. Fewer than expected buyers emerged for the government’s auction of $35 billion five-year bonds. The yield on the 10-year Treasury note rose to 3.49 percent from 3.34 percent late Monday.
The Dow closed the day higher by 20.51 points, or 0.2 percent, to 11,575.54. The Standard and Poor’s 500 index was up 0.97, or less than 0.1 percent, to 1,258.51. The technology-focused Nasdaq composite index lost 4.39, or 0.2 percent, to 2,662.88.
Earlier in the day, the Conference Board announced that consumer confidence in the economy slid to a level of 52.5 in December, down from 54.3 in November, as Americans continued to fret about the high rate of unemployment. The market was expecting a slightly higher reading because of signs of improved consumer spending in the Christmas holiday season this year.
“The spending patterns this Christmas looks better, but unemployment continues to be a big question,” said Kim Caughey Forrest, senior equity research analyst at Fort Pitt Capital Group.
Another factor weighing on the minds of traders is fear that the housing market will continue to fall. Standard & Poor’s/Case-Shiller said Tuesday that home prices fell 1.3 percent in October from a month earlier.
Home prices slid across the country, including the biggest cities. Prices were down 2.9 percent in Atlanta, 2 percent in Chicago, and 1.9 percent in San Francisco.
Energy and materials companies were posting gains as the price of crude oil gained. Chevron Corp. led Dow gainers, rising 1.2 percent to finish at $91.19.
American Express Co. had the largest fall, losing 0.6 percent to $42.79.
In corporate news, General Motors Co. gained 2.1 percent to close at $35.32 after a handful of analysts from investment banks that underwrote the automaker’s IPO initiated coverage with favorable ratings.
Home builder Beazer Homes USA Inc. fell 4.5 percent to $5.37 on the disappointing home prices report.
The dollar slid to a 7-week low versus the Japanese yen Tuesday in thin post-Christmas trading, but rose against the euro and pound.
About 559 million shares changed hands, about half the usual volume on Wall Street. Trading is expected to be light for most of the week as many investors have already closed their books for the year.
Falling shares narrowly outpaced rising ones on the New York Stock Exchange.
Electric car maker Fisker Automotive plans to sell its luxury Karma model in China, teaming up with a local distributor of top auto brands.
Irvine, California-based Fisker has reached an agreement with vehicle retailer and service provider China Grand Automotive Group to sell Fisker vehicles in its more than 200 outlets, which carry such brands as Mercedes-Benz, Lexus and Lamborghini.
The Fisker Karma is due to debut in China at the Shanghai Auto show next April and to begin deliveries by the autumn, the company said in a release seen Thursday on its website. The hybrid sedan has a total range of 483 kilometers (300 miles) and can travel 80 kilometers (50 miles) on electricity alone.
The first factory built Karma debuted at the Paris auto show in October.
“With its vast network of experienced retailers CGA will give Fisker an instant and credible footprint in the region,” said Henrik Fisker, Fisker’s CEO.
He said China’s fast growing market and keenness to reduce smog make it a good potential market for Fisker. Though most Chinese car buyers purchase economy or mid-range vehicles, there is a relatively large and growing pool of affluent car aficionados who opt for flashy luxury sedans and sports cars.
China is promoting use of electric vehicles with subsidies and other incentives, but has yet to construct a widespread system of charging stations and other infrastructure _ one factor behind the relatively low level of interest so far in purchasing electric and hybrid vehicles in a market that is forecast to grow 30 percent this year.
China Grand Automotive, one of five international distributors for Fisker, estimates its 2010 sales at 50 billion yuan ($7.5 billion). The company is a joint venture between Xinjiang Guanghui Industry Investment (Group) Co., a diversified property and energy group, and Texas-based private equity firm TPG Newbridge Capital LLC.
Call it the pregame show for Santa and his elves.
Monday is expected to be the busiest day in FedEx history, with nearly 16 million packages moving on its conveyer belts, trucks and planes. That’s up 13 percent from 14.2 million on the busiest day last year, and double what the company handles on a normal day.
That jump in shipments bodes well for the nation’s retailers, online stores and larger rival UPS, which has its single busiest day next week.
About half of the increase is from the company’s SmartPost partnership with the U.S. Postal Service. SmartPost moves lighter, cheaper packages through FedEx that are then delivered by a postal worker. A growing number of online and catalog purchases is driving growth in that unit and across the company.
Online holiday spending since Nov. 1 is up 12 percent over last year, to nearly $22 billion, according to research company comScore. Last Monday and Wednesday ranked in the top five days for online spending ever, comScore said no fax cash advances.
Consumers are using smart phones and other mobile devices, as well as computers, to buy and ship. Online orders overall are likely to spike again this Friday, which many merchants are promoting as “Free Shipping Day.”
Online spending increases come with modestly brighter prospects for holiday spending in general. Retail experts predict total spending will increase 2 percent to 4 percent compared with last year.
UPS expects its busiest day closer to Christmas, on Dec. 22 when it will move about 24 million packages. That’s 60 percent more than a normal day. The Atlanta-based company will accept packages for Christmas delivery through Dec. 23.
FedEx’s busiest day is the high water mark of a holiday season in which it expects to move 223.3 million shipments worldwide. That’s 86 packages delivered every second from Thanksgiving Day to Christmas Eve. UPS will deliver almost double that
New claims for jobless benefits hit their lowest level in more than two years last week while consumer spending rose for a fourth straight month in October, suggesting the economy is nearing a self-sustaining recovery.
The picture was further brightened by another report on Wednesday that showed consumer sentiment in November reached its highest level since June, likely reflecting the surge in stock prices in the wake of a Federal Reserve decision to loosen monetary policy.
But the upbeat mood was tempered somewhat by unexpected declines in new home sales and orders for long-lasting manufactured goods in October.
“Up to this point I was very reluctant to say we have turned the corner into a self-sustaining expansion. I think we are verging on that,” said Robert Dye, senior economist at PNC Financial Services in Pittsburgh.
Initial claims for state unemployment benefits fell 34,000 to 407,000, the lowest since mid-July 2008, the Labor Department said. That was well below economists’ expectations for a fall to 435,000.
Claims have broken out of lofty ranges that had held for much of the year and are now firmly in territory that economists say suggest solid job creation.
A separate report from the Commerce Department showed consumer spending rose 0.4 percent in October, just a touch below the 0.5 percent rise expected on Wall Street.
STRENGTHENING RECOVERY
The jobs and spending data provided further evidence of a strengthening in economic activity and helped to divert investors’ attention from Ireland’s debt crisis. U.S. stocks rose, while prices for government debt tumbled. The U.S. dollar was little changed against a basket of major currencies.
Spending is expected to get a boost this Friday, the traditional start to the holiday shopping season.
Consumers’ willingness to open their wallets was highlighted in upscale jeweler Tiffany & Co’s quarterly results, which beat Wall Street forecasts.
“It looks like Christmas is coming this year after all, and holiday spending will be the best since 2006,” said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi UFJ in New York.
Although spending increased last month, inflation continued to slow, helping to deflect criticism of the Fed’s decision to pump more money into the economy by buying an additional $600 billion worth of government debt no checking account payday advance.
The consumer spending report showed the Fed’s preferred core inflation measure slipped to just 0.9 percent when measured from year-ago levels, the smallest gain on records dating to 1960. Fed officials, who are worried an unexpected shock could tip the economy into a troubling deflation, want to see inflation running around 1.7 percent to 2 percent.
SENTIMENT RISES, BUT HOME SALES, PRICES FALL
Economists attributed the rise in the Thomson Reuters/University of Michigan’s final November consumer sentiment index to both improving labor market conditions and the lift stocks received from the Fed’s so-called quantitative easing. The index reached 71.6 this month, up from 67.7 in October.
“It does look like the launch of quantitative easing is coinciding with a turning point in the U.S. economy. Can we say there is a direct one-to-one correlation, I don’t think we can say that yet, but the timing sure looks good,” said PNC Financial’s Dye.
But an 8.1 percent drop in new homes sales to a 283,000 unit annual rate last month was a reminder of the risks to the recovery from the worst recession since the 1930s. The median new home price fell a record 13.9 percent from September to the lowest level since October 2003.
The Commerce Department also said durable goods orders slipped 3.3 percent, the largest decline since January 2009. Excluding transportation, orders dropped 2.7 percent, the biggest fall since March 2009.
Though economists were reluctant to read too much into the data given its volatile nature and the fact that the decreases followed big gains in September, they were worried that the drop in orders was almost across the board.
More concerning, non-defense capital goods orders excluding aircraft — a closely watched proxy for business spending — dropped 4.5 percent after rising 1.9 percent in September.
NEW YORK â Viacom plans to rid itself of Harmonix, the video game developer behind the Rock Band franchise, ending a failed foray into the gaming business.
Shares of Viacom rose 4 per cent in midday trading on Thursday as the company reported quarterly results that topped Wall Street expectations.
Analysts had long questioned the value of Rock Band for a company known more for its cable networks MTV, Comedy Central and Nickelodeon as well as film studio Paramount Pictures.
âThe decision to sell Rock Band is welcome news,â said Christopher Marangi, an analyst at Gabelli & Co. âThe franchise has been a disappointment and a drag on earnings.â
Viacom Chief Executive Philippe Dauman said on a conference call with analysts that it decided to put Harmonix up for sale because it didnât have the expertise in console gaming.
Viacomâs better-than-expected earnings were helped by a rise in advertising revenue due to the popularity of its hit MTV show Jersey Shore.
U.S. advertising revenue rose 8 per cent at its cable networks. A strong market for purchasing last minute commercial spots from financial firms, movies, toys and games helped push ad revenue up for the third consecutive quarter.
Dauman expects the current pace of advertising growth to continue. âFrom our vantage point the economy is improving,â said Dauman. âThis gives me confidence for another quarter of sequential improvement in ad sales.â
Evercore analyst Alan Gould wrote in a note that Viacomâs third-quarter domestic advertising revenue beat its forecast of 6.5 per cent.
âI think overall Viacom once again proves its one of the most stable, solid stories in the media business,â said Benchmark Co analyst Frederick Moran. âIt is clearly benefiting from the advertising recovery.â
The Epix pay television channel, which is owned by Viacomâs Paramount Pictures, Metro-Goldwyn-Mayer Studios and Lions Gate Entertainment Corp., is on the path to profitability this quarter, executives said on the call.
In August, Epix struck an exclusive $1 billion (U.S.) deal with Netflix Inc giving the movie rental company online rights that allow its members to watch films like Iron Man and Saw.
But Dauman said that while heâs happy with the Netflix deal, he does not see any evidence that people are dropping pricey pay-TV subscriptions in favor of such online services, a practice known as cord cutting.
âWe donât see cord cutting affecting our business,â Dauman said. âItâs much ado about very little.â
Last week, Time Warner Inc and News Corp executives reassured investors they saw no signs of cord cutting among consumers.
But early signs that people were seeking to cut discretionary spending in a weak economy or were simply fed up with ever increasing pay-TV bills are beginning to emerge.
Time Warner said is will lose 1.5 million HBO customers this year, blaming it on a lack of promotions and possibly the economy. HBO generates close to 30 per cent of Time Warnerâs annual profit.
Viacomâs total revenue rose 5 per cent to $3.33 billion (U.S.) beating analystsâ average forecast of $3.30 billion according to Thomson Reuters I/B/E/S.
Revenue at its media networks division rose 8 per cent to $2.1 billion. Global affiliate revenueâfees paid by cable, satellite and phone companiesâfor the cable networks advanced 10 per cent to almost $800 million.
Revenue for film entertainment, which includes Paramount Pictures, rose 1 per cent to $1.2 billion thanks to a boost in TV license fees and despite the release of the popular movie Transformers in the year-ago quarter. Worldwide DVD sales fell 13 per cent.
Net income for the third quarter was $189 million, or 31 cents per share, compared with $463 million, or 76 cents per share, a year earlier.
Excluding $27 million in one-time tax-related gains, the companyâs earnings from continuing operations totaled 75 cents a share, beating analysts average estimate of 70 cents per share.
DETROIT â The new Jeep Grand Cherokee drove Chrysler to within sight of profitability and lifted the automakerâs share of the U.S. market.
Chrysler said Monday it cut its losses in half between the second and third quarters, helped by the strong-selling Jeep. The company, which nearly went under last year, also upgraded its full-year profit forecast, saying it will end the year with more than triple the operating profit it previously forecast.
The new Jeep is the first of nearly a dozen new cars and trucks, including a small Italian-designed car that Chrysler is introducing in the U.S. by December. Chryslerâs survival is riding on the new arrivals, and it hopes theyâre as successful as the Grand Cherokee, whose sales have jumped more than 40 percent so far this year.
The 2011 Grand Cherokee debuted in June to strong reviews, and buyers responded to the upgraded interior as well as advancements like a hydraulic system that lifts the vehicle up if the driver wants to go off-roading. Sales were up 41 percent through October; by comparison, industrywide sales of SUVs and crossovers were up 18 percent, according to Autodata Corp. Ram truck sales also were strong.
âWe are committed to ensuring that every new vehicle this company launches has the same high quality and technological advances as the Jeep Grand Cherokee,â Chrysler CEO Sergio Marchionne said in a statement.
Chrysler Group LLC lost $84 million in the third quarter (dollar figures U.S.), compared with a loss of $172 million in the previous quarter. Chryslerâs revenues rose 5.2 percent to $11 billion. The company compared results with the second quarter rather than the prior year because this was the first time since 2006 it has reported third-quarter results.
Chryslerâs sales dropped slightly from the second quarter, but that is typical for this time of year. More important, the company said it gained U.S. market share for the fifth consecutive quarter faxless cash advance. Chrysler now holds 9.6 percent of the U.S. market. That figure is up from a 7 percent share it held last summer after it exited bankruptcy but down from nearly 13 percent three years ago.
Auburn Hills, Michigan-based Chrysler, which has been managed by Italian automaker Fiat SpA since it left bankruptcy protection last year, said it expects to make a pre-tax profit of $700 million this year, up from a previous forecast of $200 million. It also expects to end the year with $500 million in positive cash flow, up from an initial prediction that it would run through $1 billion in cash.
These are mile markers for the company as it prepares for an initial public offering next year. Chrysler needs to convince investors itâs on the right track if it wants to pay back billions in loans from the U.S. and Canadian governments. Chrysler has already repaid nearly $4 billion of the $15.5 billion in loans it received.
But Chrysler has a long way to go before it looks as healthy has its U.S. rivals. General Motors Co. expects to make as much as $2.1 billion when it reports third-quarter results Nov. 10, its third consecutive profitable quarter since it left bankruptcy protection. GM is planning an initial public offering later this month. Ford Motor Co., which didnât take government bailout money, recently reported a $1.7 billion quarterly profit.
The proof that Chryslerâs comeback has staying power could come in the fourth quarter, as the company unveils 11 new or revamped vehicles, including the redesigned Chrysler 300 and Sebring sedans and the new Fiat 500 minicar. While the Jeep Grand Cherokeeâs sales have been strong, theyâre not surprising, since Jeep has long had some of the most loyal customers in the industry. Now Chrysler hopes some of the Grand Cherokeeâs magic can transfer to the rest of its lineup.
For the first time ever, the government auctioned off 5-year inflation-indexed Treasuries at a negative yield Monday, as investors bet rising prices will be an issue in the next five years.
For more than three weeks, bond traders have focused on forecasts that the Fed will announce a second major round of asset purchases in November in an effort to stimulate the American economy.
And during a $10 billion auction of 5-year Treasury Inflation Protected Securities, or TIPS, at a negative 0.55% yield, it was clear bond traders think the Fed will be successful at spurring inflation, said Kim Rupert, a fixed income analyst with Action Economics.
So why would bond traders opt for negative returns?
Unlike other Treasuries which have a set yield, TIPS are tagged to inflation rates, so if inflation goes up, the government pays a premium to the bond holder. In this case, investors must be thinking that "inflation rates will be problematic in five years, and the premium is going to be rather large," Rupert said.
While TIPS have a niche audience and $10 billion is still a rather small auction, the fact that a negative yield would draw demand is indicative of the overall trend driving demand for government bonds lately, she said.
Investors are speculating the Fed will announce another round of so-called quantitative easing in November — and that policy would likely include a large buy of Treasuries.
The result of these purchases would, in theory, drive prices up, while pushing yields down on government bonds; hence the reason why investors have been trying to get ahead of the Fed by buying up long-term bonds at their current prices and yields.
What yields are doing: After falling nearly all day, the yield on the benchmark 10-year note rose to 2.57% late in the trading session, up from 2.56% on Friday.
The yield on the 30-year bond fell to 3.91%, from 3.94% Friday.
After the TIPS auction, yields on the 2-year note rose to 0.37%, and the 5-year note rose to 1.18%.
Auctions: Monday’s price gains were contrary to the traditional activity seen during an auction week — as traders usually try to push the price of bonds down ahead of major government auctions.
On deck for the rest of the week: a $35 billion auction of 2-year notes on Tuesday, $35 billion in 5-year notes on Wednesday, and $29 billion of 7-year notes on Thursday.
In the meantime, bond traders will continue to watch for more clues ahead of the the Fed’s decision and mid-term elections next week.
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