Bloomberg News

Treasury Yields Rise to Year High as Fed Says Economy Improves

March 13, 2012

Treasury (YCGT0025) yields rose to the highest level this year after Federal Reserve policy makers raised their assessment of the economy as the labor market gathers strength and refrained from new actions to lower borrowing costs.

Yields on 10-year notes rose earlier for a fifth day, the longest stretch of increases since January, after a report showed retail sales increased the most in five months. The gain in yields bolstered demand at a government sale of $21 billion of the securities. The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 3.24, compared with 3.1 for the past 10 sales.

“The Fed begrudgingly acknowledged improvement in the economy,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Acknowledging now that things are getting better and we may not need to do what we’re doing will invigorate confidence in the economy. That’s what we need, confidence, that’s what we’re lacking.”

The benchmark 10-year note yield increased nine basis points, or 0.09 percentage point, to 2.13 percent at 5:09 p.m. New York time, according to Bloomberg Bond Trader prices. It was the highest level since Dec. 2. Before today, 10-year yields had traded this year between 1.79 percent and 2.09 percent. The price of the 2 percent security due in February 2022 dropped 26/32, or $8.13 per $1,000 face amount, to 98 7/8.

Thirty-year bond yields climbed 10 basis points to 3.27 percent, advancing above 23.6 percent for the first time since Oct. 31.

‘Improved Further’

The labor market has “improved further; the unemployment rate has declined notably in recent months but remains elevated,” the policy-setting Federal Open Market Committee said in a statement at the conclusion of a meeting today in Washington. While global financial-market strains have eased, they continue to “pose significant downside risks to the economic outlook,” it said.

“The Fed will wait and see how the economy performs in the summer and fall without additional easing,” said Michael Dueker, a former St. Louis Fed economist, now the chief economist for Russell Investments North America. The firm manages $141 billion in fixed-income assets. “The Fed was toying with the idea of bond yield purchases, but there was no indication of that in today’s statement.”

Sixty-one percent of respondents in a March 9-12 Bloomberg News survey said Fed Chairman Ben S. Bernanke would 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.

Two Rounds

The central bank bought $2.3 trillion of securities in two rounds of quantitative easing from December 2008 to June 2011 to spur the economy.

The best six-month streak of job growth since 2006 may not be enough to convince Bernanke and fellow policy makers they can meet their goal of maximum employment without additional easing measures. The central-bank chairman last month told U.S. lawmakers that the job market remains “far from normal” even as it showed signs of improvement.

Mortgage-bond market prices suggest investors now view the odds of a third round of quantitative easing at about 35 percent, up from less than 20 percent early last week while down from 40 percent about a month ago, according to Credit Suisse Group AG analyst Mahesh Swaminathan.

The Fed left unchanged today its statement that economic conditions would probably warrant “exceptionally low” interest rates at least through late 2014. It has held its target rate to a range of zero to 0.25 percent since December 2008.

‘Little Bit Higher’

“The market’s repricing on a little bit higher expectations, but the Fed is not giving in completely to a total pro-growth story,” said Gemma Wright-Casparius, who co-manages the $41 billion Vanguard Inflation-Protected Securities Fund. “The market is assessing that the range for interest rates might be a little bit higher than we’ve been in for the last four months.”

The FOMC said inflation “has been subdued in recent months although prices of crude oil and gasoline have increased lately.” An increase in oil will “push up inflation temporarily, but the committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate,” it said

The difference in yield between 10-year Treasury Inflation Protected Securities and nominal U.S. notes, known as the break- even rate, touched 2.35 percent today, the highest since August on an intraday basis. The figure indicates traders’ expectations for consumer prices over the life of the security. The average over the past year is 2.19 percent.

Today’s Auction

The government’s offering of 10-year notes today drew a yield of 2.076 percent, which equaled the forecast in a Bloomberg survey of nine of the Fed’s 21 primary dealers. The Treasury auctioned $32 billion of three-year notes yesterday and will sell $13 billion of 30-year bonds tomorrow.

Ten-year notes yielded 2.02 percent at last month’s auction, up from the Jan. 11 sale of the maturities, which drew a record low yield of 1.90 percent.

Indirect bidders, an investor class that includes foreign central banks, purchased 38.6 percent of the notes today, compared with an average of 43.9 percent for the past 10 sales.

Bank of America Merrill Lynch’s MOVE index, measuring price swings based on options, dropped yesterday to 69.9 basis points, the lowest level since July 2007. The gauge rose to 73.8 basis points today in New York. It climbed as high as 117.8 on Aug. 8. The reading means traders expect a yield range of 73.8 basis points on an annualized basis in the next month.

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 gain in January.

To contact the reporters on this story: Susanne Walker in New York at; Daniel Kruger in New York at;

To contact the editor responsible for this story: Dave Liedtka at

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