Bloomberg News

Treasury Two-Year Note Yields Touch Seven-Month High Before Fed’s Decision

March 13, 2012

Treasury (YCGT0025) two-year note yields rose to a seven-month high before the Federal Reserve decision and a U.S. report forecast by economists to show retail sales increased in February.

Ten-year yields advanced for a fifth day before the Treasury sells $21 billion of the securities today, and 30-year yields increased before tomorrow’s $13 billion auction of the debt. A Bloomberg News survey showed the best six months of job gains since 2006 have helped reduce the odds of a third round of asset purchases by the Fed this year.

“The economic data are somewhat better, so there is no reason to think that the Fed will take additional steps now,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “We would expect some downward pressure on Treasuries because yields are very low, but because the outlook for monetary policy is very accommodative, there’s a limit on how much yields can rise.”

Yields on two-year notes were up less than one basis point, or 0.01 percentage point, to 0.33 percent at 7:23 a.m. in New York, according to Bloomberg Bond Trader prices. The 0.25 percent securities maturing in February 2014 dropped less than 1/32, or 31 cents per $1,000 face amount, to 99 27/32.

The two-year note yields were at the highest level since Aug. 4. Yields on benchmark 10-year notes gained two basis points to 2.05 percent after increasing nine basis points over the previous four trading days. Thirty-year bond yields advanced two basis points to 3.19 percent.

Treasury Volatility

Bank of America Merrill Lynch’s MOVE index, measuring price swings based on options, dropped yesterday to 69.9, the lowest level since July 2007. The gauge was as high as 117.8 on Aug. 8.

Retail sales advanced 1.1 percent last month in the biggest increase since September, according to a Bloomberg News survey before today’s Commerce Department report. Sales gained 0.4 percent in January.

Fed Chairman Ben S. Bernanke said on Jan. 25 after the central bank’s previous meeting that policy makers were considering additional asset purchases to boost growth. The central bank also extended a pledge to keep the benchmark interest rate at almost zero through at least late 2014. The Fed bought $2.3 trillion of securities in two rounds of quantitative easing from December 2008 to June 2011.

“A large-scale expansion of quantitative easing is much less likely,” said Hitoshi Asaoka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s third-largest listed bank by market value. The increase in yields “results from strong U.S. economic data.”

Outlook for Fed

Sixty-one percent of respondents in a March 9-12 Bloomberg News survey said Bernanke will refrain from any action to expand the Fed’s $2.89 trillion balance sheet this year. In January, 50 percent of those surveyed predicted more bond buying. The Federal Open Market Committee will release its statement at about 2:15 p.m. after meeting in Washington.

The difference in yield between Treasury Inflation Protected Securities (USGGBE10) and nominal bonds indicates investors expect consumer prices to rise 2.31 percent annually over the next 10 years. That’s up from a 2011 low of 1.67 percent reached on Sept. 23.

Euro-area finance ministers said after a meeting yesterday that Spain should consider additional austerity measures to cut its deficit and meet budget targets. They also signed off on a second Greek bailout fund after the nation led its creditors into the biggest restructuring of sovereign debt in history.

Europe ‘Improving’

“The situation in Europe has been improving lately, but their fiscal problems have yet to be resolved,” said Shinichiro Kadota, who covers non-yen bonds as a strategist at Barclays Plc in Tokyo. “Demand for Treasuries will remain resilient in a flight to quality from Europe’s problems.”

The 10-year U.S. notes being sold today yielded 2.05 percent in pre-auction trading, compared with 2.02 percent at the previous auction of the securities on Feb. 8.

At yesterday’s $32 billion sale of three-year notes. indirect bidders purchased 34.6 percent of the securities, compared with an average of 36.8 percent during the past 10 sales. The class of investor includes foreign central banks.

Treasury 10-year yields will increase to 2.54 percent by year-end, according to the average forecast in a Bloomberg News survey, with the most recent projections given the heaviest weighting. The yields have been in a range of 1.79 percent to 2.09 percent this year.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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