Bloomberg News

Treasuries Lose Most in First Half Since 2009 on Outlook for Fed

June 29, 2013

Treasuries lost the most this year since 2009 as investors fled U.S. debt after the Federal Reserve signaled the world’s biggest economy may be strong enough to allow the central bank to reduce its bond buying this year.

U.S. bonds fell for a third quarter, the longest losing streak since 1999, Bank of America Merrill Lynch data show. Ten-year note yields touched 2.66 percent this week, the highest since August 2011, after Fed Chairman Ben S. Bernanke said June 19 policy makers may begin slowing purchases under quantitative easing this year and end them in mid-2014. The jobless rate fell in June to match the lowest since 2008, data next week may show.

“The move higher in rates is all about central-bank action,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The move looks to be overdone given the economy, but the Fed has dominated the market with asset purchases. And if they are ready to start pulling back, investors don’t want to be the last ones out the door.”

Treasuries slid 2.57 percent this year through June 27, a Bank of America Merrill Lynch index showed. It was the biggest drop since the first half of 2009. U.S. government debt fell 2.32 percent in the second quarter, after losing 0.3 percent from January through March and slipping 0.1 percent in fourth-quarter 2012, Merrill Lynch indexes showed. It was the longest stretch since the three quarters ended in June 1999.

Since 2003

Ten-year (USGG10YR) note yields climbed the most in almost a decade over the two past months, according to Bloomberg Bond Trader prices, surging 46 basis points, or 0.46 percentage point, in May and 36 basis points in June. The 83 basis-point jump was the biggest since the 95 basis-point increase in July and August 2003. The yields declined five basis points last week to 2.49 percent. The price of the 1.75 percent securities due in May 2023 gained 3/8, or $3.75 per $1,000 face amount, to 93 19/32.

The benchmark yields advanced from a 2013 intraday low of 1.61 percent on May 1 as bets rose that the Fed would reduce the bond-buying it announced in December to put downward pressure on borrowing costs, spur economic growth and combat unemployment.

The Fed purchases $85 billion of Treasuries and mortgage bonds every month in the program, the third round of purchases in its stimulus effort. Policy makers have also kept its benchmark interest-rate target at zero to 0.25 percent since 2008 to support the economy.

Bernanke, in response to questions from lawmakers after congressional testimony on May 22, said policy makers could cut the pace of buying if the U.S. employment outlook showed a sustainable improvement. He also said tightening policy too soon would endanger the recovery.

Reduction Timetable

Treasury yields surged after the Fed chief said last week following a two-day Federal Open Market Committee meeting that the purchases may begin to be tapered this year. Reductions would depend on the economy achieving the central bank’s objectives, he said. Policy makers projected growth of as much as 2.6 percent in 2013 and 3.5 percent next year.

An interest-rate increase is “far in the future,” he said.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility MOVE Index climbed to 110.98 on June 24, the highest level since November 2011. It slipped to 97.13 on June 27, still above the 62.9 average over the past year.

Yields dropped June 27 as Federal Reserve officials said investors may have overreacted. New York Fed Bank President William C. Dudley said policy makers may prolong the purchases.

Unintended Reaction

“It seems like the Fed did not intend for the market to react the way it did about their plans for tapering,” David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors, said that day. “You have yields flirting with two-year highs.”

U.S. employers added 165,000 jobs in June, after payrolls swelled by 175,000 in May, and the unemployment rate fell to 7.5 percent, from 7.6 percent, economists in Bloomberg surveys forecast before Labor Department data due July 5. The jobless rate was 7.5 percent in April before rising in May.

“You’re starting to see some data that represents the view the Fed has in their forecasts,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “If you continue to see strong economic data, the assumption is that the Fed will be closer to tapering.”

Reports this week showed durable-goods orders rose in May and the Standard & Poor’s/Case Shiller index of property values gained in April, while the U.S. economy grew 1.8 percent in the first quarter, less than the 2.4 percent previously estimated.

‘Data-Dependent’

“While the Fed debate continues to be influenced by headlines from a variety of Fed speakers, the takeaway at this point is that we are in a largely data-dependent mode with more than a couple of months of inputs to come before it’s clear whether tapering will begin,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The Treasury Department sold $99 billion of notes this week: $35 billion of two-year debt, an equal amount of five-year securities and $29 billion of seven-year notes.

A measure of demand at U.S. debt auctions has fallen this year to the lowest since 2009 amid the drop in bond prices. Investors bid $2.94 for each $1 of the $1.077 billion of notes and bonds sold by the Treasury this year, compared with a record high bid-to-cover of $3.15 last year. It’s the first decline in demand at the auctions since 2008, when the U.S. government increased note and bond offerings 59 percent to $922 billion as the recession and the financial crisis deepened.

The bid-to-cover was 2.84 in the second quarter on $539 billion of notes and bonds sold and 3.03 in the first quarter on $538 billion of Treasuries.

To contact the reporters 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: Robert Burgess at rburgess@bloomberg.net


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