U.S. debt position not a factor in yield rise: IMF

By Daniel Bases

NEW YORK (Reuters) - Rising U.S. bond yields have more to do with improving economic growth prospects and market concerns about inflation rather than Washington's deteriorating fiscal position, the International Monetary Fund said on Wednesday.

Even as investors were selling out of U.S. Treasury positions, resulting in higher yields, there was little change in the cost to insure U.S. government debt from default or restructuring.

The dichotomy between these two markets illustrated in the IMF's Global Financial Stability Report (GFSR) shows the near fever-pitch of political rhetoric consuming Washington over U.S. debt did not have a similar effect on investors.

A last-minute budget deal struck just before a midnight deadline last Friday averted a government shutdown, but a fast-approaching deadline for raising the legal U.S. borrowing limit remains.

"Despite concerns around debt sustainability, much of the rise in long-term yields does not appear to reflect fiscal issues. Rather the rise mainly reflects higher real rates and an increase in the term premium," the IMF said in its latest GFSR report.

Term premium refers to the higher yields investors demand for holding long-term bonds against the risk of future interest rate increases.

The White House budget proposal for fiscal 2012 projects a deficit as a percentage of GDP dropping to 7.0 percent from 10.9 percent for 2011. The deficit was 8.9 percent last year.

In the six months since the last GFSR report, 10-year U.S. Treasury yields are up 102 basis points to 3.50 percent, while the cost to insure U.S. sovereign bonds annually for 10 years is now $62,000 compared with $55,000, according to data provider Markit.

"Although actual inflation indicators show subdued price pressures, market-implied inflation indicators point to upside risks in inflation and an upward trajectory in long-term inflation expectations on the back of quantitative easing, stronger growth prospects, and rising commodity prices," the report said.

Oil prices, while down on Tuesday, hover at 2-1/2-year highs, while spot gold prices are just off a record $1,476.21 an ounce.

The U.S. Federal Reserve has acknowledged the increases in short-term inflation but maintains that long-term inflation expectations remained subdued.

Fed funds rates, the U.S. benchmark, remain within the zero to 0.25 percent range. Economists do not expect them to rise until at least the end of this year, possibly in early 2012.

Quantitative easing, the Fed's $600 billion program announced in November to buy U.S. debt in order to pump cash into the financial system, had minimal impact on Treasury yields.

"While the anticipation of QE2 initially led to a sharp compression of term premia, that impact was either fleeting or had been more than offset by other factors," the IMF said.