Bloomberg News

Treasuries Drop in Longest Losing Streak Since 2006

March 15, 2012

Treasuries (YCGT0025) pared losses, pushing benchmark 10-year note yields down from the highest level in more than four months, as technical indicators suggested government securities may have plunged too far, too fast.

U.S. government debt slumped the most in a two-day period since October after the Federal Reserve raised its assessment of the U.S. economy on March 13 and said strains in global financial markets have eased. The Fed bought $4.03 billion of Treasuries today in a program to lower borrowing costs.

“When the market gets oversold, it gives a rise to bargain hunting, and that’s what’s happening now,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “The market is bouncing back from an extremely sharp selloff.”

Yields on 10-year notes rose one basis point, or 0.01 percentage point, to 2.28 percent at 5:11 p.m. in New York, according to Bloomberg Bond Trader prices. They touched 2.35 percent earlier, the highest since Oct. 28. The 2 percent securities due in February 2022 slipped 3/32, or 94 cents per $1,000 face amount, to 97 17/32.

The 14-day relative strength index for 10-year note yields indicated rates wouldn’t rise much further. The index was at 72.2. A reading of more than 70 suggests to some traders that rates may be about to reverse direction.

Thirty-year bond yields increased one basis point to 3.42 percent. They climbed earlier as much as nine basis points, or 0.09 percentage point, to 3.49 percent, the highest level since Sept. 2.

Yields Climbed

Ten- and 30-year yields climbed the most in the two days ended yesterday since Oct. 27, when Treasuries tumbled after European leaders’ efforts to resolve their sovereign-debt crisis fueled appetite for higher-yielding assets. Ten-year yields rose 24 basis points, and 30-year yields increased 23 basis points.

The 10-year Treasuries have already lost 2.5 percent in March, poised for the biggest monthly drop since December 2010, according to a Bank of America Merrill Lynch bond index.

“The recent back-up in Treasury yields has made this an attractive opportunity for investors who have been sidelined and interested in buying dips,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Volatility (MOVE) fell from a two-month high. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, declined to 83.4 basis points after reaching 89.7 basis points yesterday, the highest since Jan. 3. It fell to 69.9 basis points on March 12, the least since July 2007. The reading means traders expected a yield range of 83.4 basis points on an annualized basis in the next month.

Volume Down

Volume declined. About $375 billion in Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, down 15 percent from $439 billion yesterday, the highest since August. Average daily volume over the past year is $270 billion.

Ten-year yields are still below last year’s high of 3.77 percent and the average over the past 10 years of 3.87 percent. The increase that began this month may be limited, Christopher Low, the chief economist at FTN Financial in New York, said in an interview.

“We expect interest rates to fall in the second half of this year,” said Low, who was the only one among 70 analysts who predicted the yield would fall to 2 percent by the end of last year. It will be 2.1 percent at the end of 2012, he said.

Improvement in the labor market is not sustainable at current levels, business investment is slowing rapidly and foreign demand for exports will decline, Low said. While yields may climb to 2.5 percent over the next few months, they will stay within a range of 1.8 percent to 2.3 percent, he said.

Less Expensive

Valuation measures show government debt has become less expensive. The term premium, a model created by economists at the Fed, reached negative 0.39 percent today, after rising to negative 0.32 percent, the least since October. It touched negative 0.79 percent on Feb. 2, the most expensive ever. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

The Fed bought Treasuries today due from May 2018 to November 2019 as part of its effort to replace $400 billion of shorter-term securities in its holdings with longer-term bonds through June. Traders dubbed the program Operation Twist after a similar plan in the 1960s.

Central-bank policy makers refrained at their March 13 meeting from new actions to lower borrowing costs, saying the U.S. labor market is building strength.

Treasuries fell earlier as the Labor Department said initial claims for jobless benefits in the U.S. fell to 351,000 in the week ended March 10, matching the lowest in four years. Manufacturing in the New York region grew in March at the fastest pace since June 2010, according to data from the Fed Bank of New York.

Inflation Outlook

A measure of traders’ inflation expectations that the Fed uses to help guide policy was at 2.5 percent as of March 12, almost a two-week high. The five-year, five-year forward break- even rate, which projects annual price increases over a five- year period beginning in 2017, was still below its 2.76 percent average for the past decade. It rose to a 2011 high of 3.23 percent in August and fell to 2.09 percent in September.

The U.S. said today it will auction $13 billion in 10-year Treasury Inflation Protected Securities on March 22.

The difference between the two-year swap rate and the yield on comparable Treasuries narrowed today to 23.9 basis points, the lowest since Aug. 11, before widening to 26.3 basis points. The gap reached 59.3 basis points in November, the most in 2011.

Swap rates are usually higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk.

Mortgage Bonds

Mortgage-bond yields were little changed today, after climbing yesterday to the highest in four months and intensifying convexity selling in Treasuries, as mortgage lenders pared Treasury holdings they no longer needed to hedge against faster prepayments.

Fannie Mae (MTGEFNCL)’s current-coupon 30-year bonds yielded 3.16 percent today. They climbed as much as 18 basis points yesterday to 3.18 percent before closing at 3.16 percent.

Convexity is a measure of the rate of change of a bond’s duration as a result of changes in interest rates. Duration is a measure of a bond’s price sensitivity to changes in interest rates. Mortgage bonds are described as negatively convex, meaning that as interest rates rise, their duration increases as well because fewer homeowners are likely to refinance.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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


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