Bloomberg News

Treasury Yields Rise to 2-Year High Before Fed Minutes Release

August 19, 2013

Treasuries fell, with yields on 10-year notes reaching two-year highs for a third consecutive day, as investors look to the minutes of the Federal Reserve’s last meeting for clues on the eventual slowing of bond purchases.

Yields on the benchmark security rose to the highest since July 2011 as central bankers and policy makers also gather this week in Jackson Hole, Wyoming, to discuss the global economy and monetary policy. The Fed’s first step may be tapering monthly debt purchases in September by $10 billion to a $75 billion pace, according to the median estimate of analysts in a Bloomberg survey concluded last week. The U.S. central bank publishes the minutes of its July 30-31 meeting Aug. 21.

“Every little uptick is met with sellers,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the central bank. “There’s more of a feeling tapering is going to happen in September.”

The benchmark 10-year yield rose six basis points, or 0.06 percentage point, to 2.88 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.5 percent benchmark note maturing in August 2023 fell 15/32, or $4.69 per $1,000 face amount, to 96 23/32. The rate earlier reached 2.9 percent, the highest level since July 2011.

U.S. 10-year securities yielded 39 basis points more than bonds in an index of G-7 debt, the most since May 2010, according to data compiled by Bloomberg based on closing prices.

Volume, Volatility

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 22 percent to $246 billion, from $315.5 billion on Aug. 16. The figure is down from a 2013 high of $662.26 billion reached on May 22 and up from a low of $147.8 billion on Aug. 9. This year’s average is $313 billion.

Volatility as measured by the Merrill Lynch Option Volatility Estimate MOVE Index rose to 99.48 today, the highest level since July 9. The average for 2013 is 68.

Treasuries have lost 3.6 percent this year through Aug. 16, according to Bloomberg World Bond Indexes. German bonds dropped 2.3 percent and gilts slid 4.7 percent.

An indicator of momentum used by some dealers signaled that Treasuries are oversold. The 14-day relative-strength index for the 10-year yield has risen above the 70 threshold that indicates it has climbed too much. The last time it exceeded that level was July 5, which was followed by a two-week rally.

“The Fed not announcing anything regarding tapering is causing uncertainty and a situation where yields have to drift higher, especially on the long end, until the market knows what they are dealing with,” said Dan Heckman, fixed-income strategist in Kansas City, Missouri, at U.S. Bank Wealth Management, which manages $110 billion.

Third Round

Fed policy makers led by Chairman Ben S. Bernanke are contemplating how to end a third round of quantitative easing that has swelled the Fed’s balance sheet to a record $3.59 trillion. The central bank will end purchases in mid-2014, according to the median estimate in a Bloomberg survey of 48 economists conducted Aug. 9-13.

The Federal Open Market Committee holds its next meeting on Sept. 17-18.

“The market continues to be set adrift because people are uncertain as to what the rules of engagement will be,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “No one wants to commit to the market until they figure out where the Fed is at. There’s been a bit of a psychological change.”

Yield Curve

Sales of previously-owned U.S. homes rose in July, analysts said before an industry report due on Aug. 21. Purchases rose to a 5.15 million annualized rate, according to the median forecast of economists before the National Association of Realtors publishes the data.

The difference between U.S. two- and 10-year yields expanded to as much as 254 basis points today, the widest level since July 2011.

Bonds declined last week amid concern former Treasury Secretary Larry Summers will win out over Fed Vice Chairman Janet Yellen as the next head of the central bank, according to Jefferies LLC. Bernanke’s term ends in January.

“The growing conviction that Larry Summers as Fed Chairman should be equated with an accelerated rate of tapering has been the primary catalyst to the recent distress in both the bond and stock markets,” Ward McCarthy, the chief financial economist at Jefferies, wrote in a Aug. 16 report. The company is a primary dealer.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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


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