Treasury 30-year bonds snapped a three-day losing streak as the highest yields since 2011 fueled demand and Federal Reserve Bank of Dallas President Richard Fisher said investors shouldn’t overreact to the central bank’s plan to slow bond purchases.
U.S. 10-year (USGG10YR) notes pared losses as volatility surged. Treasuries slid earlier as government debt from Australia to Germany fell on bets a cut in accommodation from the Fed will lead to an eventual end of record low central-bank interest rates. Fed Chairman Ben S. Bernanke said June 19 U.S. policy makers may begin tapering their quantitative-easing program this year and end it in mid-2014. The Treasury will sell $99 billion in notes this week.
“Fisher helped to stabilize the market a little bit,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “Most people think Treasuries are oversold. The stabilizing comments from Fisher brought some people to feel comfortable buying the market.”
Thirty-year (USGG30YR) bond yields fell four basis points, or 0.04 percentage point, to 3.55 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They increased seven basis points earlier to 3.65 percent, the highest since Sept. 1, 2011. They rose 28 basis points last week, the most since August 2009. The price of the 2.875 percent securities due in May 2043 gained 18/32, or $5.63 per $1,000 face amount, to 87 21/32.
The 10-year note yield was little changed at 2.54 percent. It climbed 13 basis points to 2.66 percent, the highest since August 2011, and fell two basis points to 2.51 percent. The yield rose 40 basis points last week, the most in 10 years.
A technical gauge signaled U.S. government securities might be poised to end their slide. The 14-day relative-strength index, a monitor of momentum, was 77.6 for the 10-year (USGG5YR) note and 69.2 for the 30-year bond. A level above 70 suggests the yield may change direction.
Fisher, who has been among the most vocal critics within the Fed of its unprecedented measures to bolster the economy, said central-bank policy remains accommodative.
“What we’re talking about here is dialing back,” Fisher, who doesn’t vote on monetary policy this year, said in London. “The word ‘exit’ is not appropriate here.”
Fisher said he favors scaling back the Fed’s monthly bond purchases if the economy makes the kind of progress officials currently expect. Policy makers raised their growth forecasts for next year to a range of 3 percent to 3.5 percent and reduced their outlook for unemployment to as low as 6.5 percent.
Fed Bank of Minneapolis President Narayana Kocherlakota, who has called for easier policy, said the Fed must emphasize in its statement that it will remain accommodative “for a considerable time” after the end of quantitative easing. Kocherlakota, who also doesn’t vote this year, spoke in a conference call with reporters.
The Fed needs to set clearer guideposts for the outlook for record stimulus, Kocherlakota said in an earlier statement.
Volatility in Treasuries, as measured by Bank of America Merrill Lynch’s MOVE index, climbed to 110.98, according to the latest available data, the highest since Nov. 17, 2011. It has averaged 62 this year.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 8 percent to $545 billion. The 2013 average is $312 billion.
The real yield, the difference in U.S. 10-year note yields and the annual inflation rate, widened to 1.19 percentage points, the most since March 2011, exceeding the 1.13 percentage-point average of the past decade.
“The confusion in the marketplace is roiling everyone,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the Fed. “The change in real yield is alarming. When real yields rise this fast, the actual impact is much more severe than a nominal yield rise. The market believes debt has become more onerous in a real sense.”
Treasuries fell 2.8 percent this year through June 21, according to the Bloomberg U.S. Treasury Bond Index. (BUSY) The MSCI All-Country World Index of shares returned 5 percent during the period, including reinvested dividends, data compiled by Bloomberg show.
“Liquidity today is king, and what we’re getting is cascading liquidity failures,” Mohamed A. El-Erian, chief executive and co-chief investment officer at Pacific Investment Co., said today in a Bloomberg Radio interview with Tom Keene and Michael McKee. “When you change the liquidity paradigm, what you get is massive technical unwinds, and that speaks to the volatility.”
The Fed has been buying $40 billion of mortgage-backed securities and $45 billion of U.S. government debt each month to put downward pressure on borrowing costs in its third round of the quantitative-easing program.
The central bank will cut its monthly bond purchases to $65 billion at its Sept. 17-18 policy meeting, according to 44 percent of 54 economists surveyed by Bloomberg after Bernanke’s June 19 press conference. In a June 4-5 survey, only 27 percent forecast tapering would start in September.
The Fed lowered its forecasts on June 19 for the core personal-consumption-expenditure price index, its preferred measure of inflation, for this year and the coming two years, saying it won’t reach 2 percent at least until 2015. Bernanke said the same day that reducing bond purchases would depend on the economy achieving the central bank’s objectives.
The gap between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities touched 1.81 percentage points, the narrowest since October 2011, before trading at 1.92. The break-even rate signals the bond market’s expectations for the rate of growth in consumer prices during the life of the debt.
The difference between yields on 10- and 30-year Treasuries touched 0.97 percentage point, the narrowest since January 2012.
The U.S. is scheduled to auction $35 billion of two-year notes tomorrow, the same amount of five-year debt the next day and $29 billion of seven-year securities on June 27.
Germany (GDBR10)’s 10-year bund yield increased as much as 13 basis points to 1.85 percent, the highest since April 4, 2012. The yield on Australia’s 10-year government bond surged 28 basis points, the biggest jump since January 2009, to close at 4.03 percent in Sydney after reaching 4.04 percent, the highest since April 2012.
Belgium’s 10-year yield climbed 22 basis points to 2.85 percent, while the rate on similar-maturity Portuguese debt surged 37 basis points to 6.8 percent.
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