Bloomberg News

Treasury 10-Year Yields Reach 7-Week High Before Fed as Retail Sales Rise

March 13, 2012

Treasuries (YCGT0025) fell, pushing 10-year yields to the highest in seven weeks, as a gain in U.S. retail sales boosted optimism the economy is strengthening and eased bets the Federal Reserve will favor more asset purchases.

Ten-year yields rose for a fifth day, the longest run of increases since January, before the Treasury sells $21 billion of the securities. U.S. two-year note yields reached a seven- month high before a Fed policy statement today, and 30-year yields gained before tomorrow’s $13 billion sale of the debt.

“We’ve come into this week with the fear that seems to be coming to fruition of firming data, the likelihood of the Fed really not offering us anything else, and supply,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The simple math suggests we should be backing up a little bit to accommodate those things, and that’s exactly what we’ve been doing.”

Yields on benchmark 10-year notes rose four basis points, or 0.04 percentage point, to 2.07 percent at 12:30 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 2.09 percent, the highest level since Jan. 23. The price of the 2 percent securities maturing in February 2022 decreased 11/32, or $3.44 per $1,000 face amount, to 99 11/32.

Ten-year yields have traded this year between 1.79 percent and 2.09 percent. They reached a record low of 1.67 percent on Sept. 23.

Two-year note yields were up less than one basis point to 0.33 percent, the highest level since Aug. 4. Thirty-year bond yields advanced four basis points to 3.21 percent.

Net Shorts

Treasuries investors in a weekly survey by JPMorgan Chase & Co. bet for the first time since January that prices of the securities will drop. Net shorts, or wagers that prices will fall, outweighed net longs by 2 percentage points in the week ended yesterday. Fifty-seven percent of the clients surveyed were neutral.

Volatility in the Treasuries market declined yesterday to the lowest level in more than four years. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, dropped to 69.9, the least since July 2007. The gauge was as high as 117.8 on Aug. 8. The reading means traders expect a yield range of 69.9 basis points on an annualized basis in the next month.

Price swings have narrowed as the Fed’s debt-purchase programs made it the biggest owner of U.S. government securities, according to Treasury and central bank data. The Fed had holdings of $1.66 trillion as of Dec. 31, the data show, compared with China’s $1.15 trillion.

Fed Meeting

The Federal Open Market Committee is scheduled to issue its statement at about 2:15 p.m. New York time after a policy meeting.

“We may see a slight upgrade in economic conditions,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said of today’s Fed statement. The firm oversees $12 billion in fixed-income assets.

The best six months of job gains since 2006 have helped reduce the odds of a third round of asset purchases by the Fed, according to a Bloomberg News survey of economists. U.S. payrolls expanded by 227,000 jobs in February, capping the growth streak, Labor Department data showed last week.

Sixty-one percent of respondents in a March 9-12 Bloomberg News survey said Fed Chairman Ben S. Bernanke will refrain from any action to expand the central bank’s $2.89 trillion balance sheet this year. In January, 50 percent of those surveyed predicted more bond buying.

Gave No Sign

Bernanke, in Senate testimony before a March 9 jobs report, gave no sign he’s considering a new program of so-called quantitative easing. Still, he repeated that the main interest rate is likely to stay near zero through at least late 2014 to boost a job market that remains “far from normal.”

The Fed chief 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 bought $2.3 trillion of securities in two rounds of quantitative easing from December 2008 to June 2011.

Treasuries extended losses today after Commerce Department data showed retail sales increased 1.1 percent in February, matching the forecast in a Bloomberg News survey of economists. The figure compared with a revised 0.6 percent increase the previous month.

Inflation Bets

The difference in yield between Treasury Inflation Protected Securities (USGGBE10) and nominal bonds, known as the break-even rate, indicates investors expect consumer prices to rise 2.32 percent annually over the next 10 years. The average over the past year is 2.19 percent.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said in a message on Twitter that if investors want to bet on Treasuries rising, they should own them in TIPS form.

The 10-year U.S. notes being sold today yielded 2.075 percent in pre-auction trading, compared with 2.02 percent at the previous auction of the securities on Feb. 8. The January offering drew a record low yield of 1.90 percent

The February sale’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 3.05, below the 3.10 average of the past 10 auctions. Indirect bidders, a class of investors that includes foreign central banks, bought 38.9 percent of the notes at the February offering, versus a 43.9 percent average for the past 10 sales.

At yesterday’s $32 billion sale of three-year notes, indirect bidders bought 34.6 percent of the securities, compared with an average of 36.8 percent during the past 10 sales.

U.S. 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.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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