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US vies with Portugal, SA for worst-debt mantle

SA’s bonds dropped 1.91%, the most of the 26 bond markets tracked by the EFFAS.
Treasuries have dropped as much as Portuguese sovereign debt in the past month and trail only South African bonds as investors have turned increasingly confident the Federal Reserve will raise interest rates this year.

US government securities have tumbled 1.88% since Oct. 14, based on data compiled by Bloomberg and the European Federation of Financial Analysts Societies. That matches declines in Portugal, where opposition parties ousted the government this week. South Africa’s 1.91% slide, the most of the 26 bond markets tracked by the EFFAS, comes as the rand plunged to a record low, adding pressure on the monetary authority to tighten policy.

The Treasury figures demonstrate the extent to which investors are demanding higher yields as they prepare for the first interest-rate increase in almost a decade. New York Fed President William C. Dudley said Thursday the conditions for liftoff “could soon be satisfied.” Data Friday will show retail sales quickened in October, based on a Bloomberg survey of economists. Futures markets show 66% odds of a rate increase by year-end, up from 27% on Oct. 14.

Pricing In

“Strong economic figures, as well recent commentary from Fed speakers, are causing the market to price in a rate hike earlier than had been expected just a few weeks before,” said Tomohisa Fujiki, the head of interest-rate strategy for Japan at BNP Paribas SA in Tokyo. The company’s US arm is one of the 22 primary dealers that trade directly with the Fed.

BNP Paribas expects the Fed to raise interest rates once per quarter after December liftoff, about twice the pace futures currently factor in. “If that’s the case, front-end yields can rise more from here,” Fujiki said.

The benchmark US 10-year note yield was little changed at 2.32% as of 1:07 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 2.25% security due in November 2025 was 99 13/32.

The yield was as high as 2.37% this week, a level unseen since July 21, rising from less than 2% as recently as October. It’s still less than the average for the past decade of 3.13%.

Two-year notes yielded 0.88%, after reaching a five- year high of 0.95% on Nov. 6, when a report showed the economy unexpectedly added the most jobs this year in October. US retail sales probably rose 0.3% last month, based on responses from economists, which would be the biggest gain since July.

Dudley joins Fed policy makers including Chair Janet Yellen to back the case for 2015 liftoff in comments this month. Yellen told Congress on Nov. 4 that December was “live” for action. Vice Chairman Stanley Fischer also said Thursday it “may be appropriate” to raise rates next month. The Fed’s next meeting is Dec. 15-16.

©2015 Bloomberg News

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