Bloomberg News

U.S. 10-Year Yield Close to 10-Month High as Fed Debates QE Pace

February 20, 2013

Treasury 10-year yields traded close to the highest in 10 months, after Federal Reserve meeting minutes showed policy makers continued to debate when to start trimming debt purchases.

Benchmark notes fluctuated as several Fed policy makers said the central bank should be ready to vary the pace of $85 billion in monthly bond purchases amid a debate about the risks and benefits of further quantitative easing, known as QE. U.S. debt fell earlier after a report showed builders broke ground in January on the most U.S. single-family homes in more than four years and permits for future construction rose, an indication the industry’s momentum carried over into 2013. The difference between Treasury yields for two-and 10-year securities widened to 1.77 percentage points, close to the most since April.

“We’ve taken the initial selloff back after the minutes as the market has realized that the Fed is engaged more in a policy debate and less of an imminent action coming down the pipe,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 21 primary dealers that trade with the Fed. “The economy has not seen the escape velocity that they need to start to wind down purchases. Until the economy gets better, the Fed will continue to err on the side of easing.”

The U.S. 10-year yield fell two basis points, or 0.02 percentage point, to 2.01 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2023 added 5/32, or $1.56 per $1,000 face amount, to 99 29/32.

Yield Levels

The benchmark yield reached as much as 2.05 percent. It climbed to 2.06 percent on Feb. 14, the highest level since April 10.

The Fed officials “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” according to the minutes of the Federal Open Market Committee’s Jan. 29-30 meeting released today in Washington.

“The market’s initial reaction was to run with the idea that there is an increased probability of reducing the pace of asset purchases prior to year end,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said in a telephone interview. “At the same time, a number of participants also voiced concern about ending easing too soon, and that should balance the market.”

Market Reaction

Treasury 10-year yields had risen about 11 basis points since the minutes from the FOMC Dec. 11-12 meeting, released on Jan. 3, showed a divide among participants on how long the purchases should continue. Those who provided estimates were “approximately evenly divided” between participants who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date.

The Fed minutes suggest continued Fed purchases are at risk if the economy improves, Bill Gross, co-chief investment officer and founder of Newport Beach, California-based Pacific Investment Management Co., wrote in a Twitter post.

The Fed bought $3.3 billion of Treasuries maturing from May 2020 to February 2023 today as part of its outright purchase program to bolster the economy. The Fed Bank of New York said it will test allowing “small broker-dealers” to act as counterparties in sales and purchases of Treasuries for the central bank’s portfolio.

Treasury market volatility, as measured by the Bank of America Merrill Lynch MOVE index, declined to 58.4 yesterday from 59.1 on Feb. 15 and compared with the 59.74 average since the Fed announced $40 billion a month in mortgage purchases.

Moving Averages

The 200-day moving average for 10-year yields is leveling out after falling for 18 months, according to Mirae Asset Global Investments Co. The 200-day average of 1.71 percent has been little changed for almost four weeks after it tumbled from its August 2011 level of 3.17 percent.

“There is bearish momentum in the Treasury market,” said Will Tseng, a fixed-income trader in Taipei at Mirae Asset, which oversees $50 billion. “The long-term moving average has changed from a downward trend to flat. It won’t be a big jump, but it will be a slow upward trend” in yields, he said.

Wholesale prices in the U.S. rose in January for the first time in four months, reflecting higher costs for food and pharmaceuticals. The producer-price index climbed 0.2 percent after a 0.3 percent drop in December, the Labor Department reported today in Washington. The median estimate in a Bloomberg survey of 74 economists projected a 0.3 percent increase.

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.55 percentage points. The average in the past decade is 2.20 percentage points.

Treasuries handed investors a 1 percent loss this year through yesterday, after a 2.2 percent gain last year, according to Bank of America Merrill Lynch indexes.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@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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