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Treasuries fall as consumer spending fuels Fed rate speculation

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(Bloomberg) — Treasuries fell as a report showed consumer purchases adjusted for inflation rose in January, making it more likely the Federal Reserve will raise interest rates later this year.

Yields were pushed higher as companies, including Activis Plc, Peabody Energy Corp. and MetLife Inc. sell bonds while borrowing costs remain near historic lows. Stocks and oil prices rose as investors gravitated toward riskier assets after a government report showed signs the plunge in gasoline prices is helping boost consumer spending, the biggest part of the U.S. economy.

“There’s a perception in the market the Fed is ready to hike rates,” said Thomas di Galoma, head of fixed income rates and credit at ED&F Man Capital Markets in New York. “Corporate supply is certainly having an effect on yields.”

The benchmark U.S. 10-year yield rose seven basis points, or 0.07 percentage point, to 2.06 percent at 11:12 a.m. in New York, according to Bloomberg Bond Trader data. The 2 percent note due in February 2025 fell 19/32, or $5.94 per $1,000 face amount, to 99 14/32.

The 0.3 percent increase in consumer spending followed a 0.1 percent drop the prior month, a Commerce Department report showed. So-called nominal spending, which doesn’t take into account changes in price, declined 0.2 percent, more than estimated, while incomes grew 0.3 percent for a second month.

Fed watch

Futures prices indicate October is the first month where the probability that the Fed will raise its benchmark overnight rate is greater than not. The central bank has held its target for the federal funds rate at virtually zero since December 2008.

“The market is selling off, given renewed confidence that the Fed is willing to hike in mid-2015,” said Natan Magid, an interest-rate strategist at Bank of Montreal’s BMO Capital Markets in New York.

Parsippany, New Jersey-based pharmaceutical-maker Activis is planning to sell as much as $22 billion of benchmark debt to fund its acquisition of Allergan Inc.

The Nasdaq Composite Index touched 5,000 for the first time since the technology stock boom in 2000, while the Standard & Poor’s 500 Stock Index rose and U.S. benchmark crude oil futures climbed above $50 a barrel.

Asset price levels today in major markets are influencing prices,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York.

Demand for longer-term Treasuries waned as month-end buying by investors who measure their performance against bond benchmarks maintained by Barclays Plc, and which drove yields lower Friday afternoon, evaporated.

“A lot of the bid on Friday was simply a function of month-end and so the passing of the calendar relieved some of that upward pressure on the Treasury market,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

A report March 6 is forecast to show the U.S. added 235,000 jobs in February, according to a Bloomberg News survey of economists. Employers have boosted nonfarm payrolls by more than 1 million positions in the period from November through January, Labor Department data show.

–With assistance from Susanne Walker in New York.


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