Bloomberg News

Treasury Yield Curve Steepest Since 2011 as Jobs Fuel Taper Bets

December 07, 2013

The difference between yields on two-and 10-year Treasuries widened to the most since 2011 as employment gains reinforced expectations the Federal Reserve is close to slowing bond purchases used to stimulate growth.

Benchmark 10-year notes yielded 255 basis points, or 2.55 percent points, more than two-year debt as investors sought a premium against the risk of inflation that comes from faster growth and the eventual absence of the biggest buyer of Treasuries when the Fed does slow purchases. The U.S. is selling $64 billion of notes and bonds next week, and Fed policy makers will meet Dec. 17-18.

“Every time we get numbers that are better than expected, it’s a curve steepener,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist at Morgan Stanley Smith Barney. The Fed will be able to “take off the training wheels” because this “will be a self-sustaining recovery,” he said.

The yield curve, as the difference is known, widened nine basis points this week as it reached the steepest level on a closing basis since July 2011. It touched 261 basis points yesterday, the steepest intraday level since July 2011. It decreased to 145 basis points the week ended April 26, the narrowest this year.

The benchmark Treasury 10-year note yield rose 11 basis points to 2.86 percent this week in trading in New York in its its third weekly increase, the longest stretch in six months. It was the biggest advance in a month. Two-year (USGG2YR) note yields added two basis points, the most since Oct. 11, to 0.3 percent. They reached 0.32 percent yesterday, the highest level since Nov. 13.

Volatility Climbs

A gauge of Treasuries volatility rose to the highest level in almost two months. The Bank of America Merrill Lynch MOVE index reached 76.1 on Dec. 5, the most since Oct. 11, before declining yesterday to 69.2. The 2013 average is 71.5.

The Bloomberg U.S. Treasury Bond Index (BUSY) has dropped 2.8 percent in 2013 as Fed purchases fueled appetite for higher-yielding assets. Stocks have climbed, with the Standard & Poor’s 500 Index returning 29 percent including reinvested dividends.

U.S. employers added 203,000 jobs last month and the unemployment rate reached a five-year low of 7 percent, the Labor Department reported yesterday. The median forecast of 89 economists surveyed by Bloomberg called for a 185,000 increase. The data followed other reports this week that showed the American economy grew faster in the third quarter than previously estimated and manufacturing increased in November.

Purchase Forecasts

The share of economists predicting the Fed will slow bond purchases this month doubled after the jobs report. Thirty-four percent surveyed yesterday by Bloomberg said policy makers will probably start the reductions at their December meeting, an increase from 17 percent in a Nov. 8 survey. In November, 53 percent forecast a tapering in March, compared with 40 percent in yesterday’s poll of 35 economists.

The Fed buys $85 billion of bonds a month to push down borrowing costs and spur economic growth. Minutes of policy makers’ last meeting said they expected economic data to show improvement in the labor market and “warrant trimming the pace of purchases in coming months.” The record of the Oct. 29-30 gathering was released Nov. 20.

“The progress we’ve seen in economic data has continued, and the cumulative process continues,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said yesterday. “The Fed wants to taper, and they are almost there. The Fed needs a few more data points to cement their conviction that the taper is the right move now.”

Bill Gross, manager of the world’s biggest bond fund, said yesterday the pace of payrolls growth in November signals there’s a 50 percent chance the Fed will begin slowing the purchases in December.

‘Wants Out’

“There was some logic for a January starting point, but it’s clear the Fed wants out,” Pacific Investment Management Co.’s Gross said in a radio interview on Bloomberg Surveillance with Tom Keene and Mike McKee. “The Fed still has to be careful even when they begin to taper,” given the recent pace of growth has produced growth at only about 2 percent so far, he said.

Fed Chairman Ben S. Bernanke said Nov. 19 in a speech to economists that the benchmark interest rate will probably stay low long after the bond purchases end. Policy makers have held it at zero to 0.25 percent since 2008 to support the economy.

In a separate government report yesterday, the price index tied to consumer spending, a measure of inflation tracked by Fed policy makers, increased 0.7 percent in October from a year earlier. It was the least since October 2009. The central bank’s goal is to keep prices increasing at around 2 percent.

Core prices, which exclude the volatile food and fuel categories, rose 0.1 percent from September and were up 1.1 percent from October 2012, the data showed.

Real Yields

The extra yield that Treasury 10-year notes offer over the U.S. inflation rate was 1.91 percentage points yesterday. Real yields haven’t been so high since February 2011, data compiled by Bloomberg show.

“Every time you get a little better-than-expected report, it brings us to closer to the end of the party,” Jay Mueller, who manages about $2 billion of bonds at Wells Capital Management in Milwaukee, said yesterday. “The data is not the knockout blow by itself that brings on tapering, though. We’ll need to see more cumulative data.”

Treasuries fell earlier this week as the Commerce Department reported that U.S. gross domestic product expanded at a 3.6 percent annualized rate in the third quarter, up from an initial estimate of 2.8 percent and the most since the first quarter of 2012. The Institute for Supply Management’s manufacturing index increased to 57.3 in November, the highest since April 2011, the Tempe, Arizona-based group said Dec. 2.

The Treasury will auction $30 billion of three-year notes on Dec. 10, $21 billion of 10-year (USGG10YR) debt on Dec. 11 and $13 billion of 30-year bonds on Dec. 12.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@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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