Bloomberg News

U.S. 10-Year Notes in Longest Losing Streak in Six Months on Fed

December 28, 2013

Treasury 10-year notes fell for a sixth straight week, the longest stretch since June, as signs of a quickening economic recovery boosted speculation the Federal Reserve will keep cutting debt purchases.

Yields on the benchmark note jumped to the highest in more than two years as investors weighed the Fed’s decision last week to reduce $85 billion in monthly bond-buying in January while reinforcing its commitment to low interest rates. Manufacturing in the U.S. was at almost the highest since 2011 this month, the Institute for Supply Management is forecast to report next week.

“The Fed’s actions and positive signs for the economy helped yields move higher,” said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of the 21 primary dealers that trade with the central bank. “As the new year begins, the data will become even more significant, as the Fed’s future tapering actions are dependent on it. Yields may grind higher, although it won’t be in a straight line.”

The 10-year yield climbed 11 basis points, or 0.11 percentage point, to 3 percent this week in New York, according to Bloomberg Bond Trader prices, its first time at that level since September. The yield, the benchmark on everything from mortgages to corporate bonds, reached 3.02 percent, the highest since July 26, 2011. The price of the 2.75 percent security maturing in November 2023 fell 30/32, or $9.38 per $1,000 face value, to 97 7/8. Its last six-week losing streak ended June 7.

Two-year (USGG2YR) note yields rose one basis point to 0.39 percent as the securities declined for a fifth straight week. Thirty-year bond yields increased 11 basis points to 3.94 percent.

Volume Drops

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, slid during the holiday-shortened week. Daily volume dropped to $72.7 billion on Dec. 26, less than one-quarter of the year’s average of $309 billion. It was $129.4 billion yesterday. Trading closed early on Dec. 24 and remained shut the following day for Christmas.

U.S. government securities lost 3.3 percent this year as of Dec. 26, according to the Bloomberg U.S. Treasury Bond Index. (BUSY) That compares with a 0.3 percent decline by the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index.

The Standard & Poor’s 500 Index of U.S. stocks gained 32 percent this year, including reinvested dividends.

“The 10-year Treasury yield is again back at 3 percent because of the Fed,” said Mark Grant, managing director at Southwest Securities Inc. in Fort Lauderdale, Florida. “The bond market is giving us a signal that the Fed’s tapering is going to impact interest rates, probably making them go even higher. The bond market leads the equity market about 99 percent of the time, so I’m also expecting a correction in U.S. equities after the first of the year.”

Cheap Treasuries

Treasuries traded at almost the cheapest level in more than two years, based on the term premium, a model that includes expectations for interest rates, growth and inflation. The gauge was at 0.62 percent yesterday, after reaching 0.63 percent on Sept. 5, the least expensive since May 2011, according to a Columbia Management model.

The latest reading was above the average of 0.21 percent over the past decade and shows investors see bonds as close to fairly valued.

Bonds fell this week as reports showed U.S. durable-goods orders rose in November more than forecast and new-home sales exceeded projections. The data followed figures Dec. 20 showing U.S. gross domestic product climbed at a 4.1 percent annualized rate in the third quarter, the strongest growth since the final three months of 2011 and up from a previous estimate of 3.6 percent.

‘Larger Story’

“This is part of a larger story that the economy is better,” Dan Greenhaus, chief global strategist in New York at BTIG LLC, said Dec. 24. “The bias in yields remains to the upside.”

Economists in a Bloomberg survey forecast the ISM manufacturing index was at 56.9 in December, after reaching 57.3 the previous month, the highest since April 2011. The Tempe, Arizona-based group will release the data on Jan. 2. Readings above 50 indicate growth.

The Federal Open Market Committee said after its Dec. 17-18 policy meeting it will lower its monthly purchases of Treasuries and mortgage bonds by $5 billion each in January, to a total of $75 billion, amid “growing underlying strength” in the economy. Fed Chairman Ben S. Bernanke said at a press conference policy makers may take “further measured steps” to slow the pace of asset purchases depending on the performance of the economy.

Taper Bets

The central bank will taper the purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, according to the median forecast in a Bloomberg survey of 41 economists on Dec. 19.

Bond traders will be focused on the Fed Bank of New York’s announcement Dec. 30 of the schedule for its $40 billion of Treasury purchases next month, said Simons of Jefferies.

The Fed also said last week it “likely will be appropriate to maintain the current target range for the federal funds rate well past” policy makers’ 6.5 percent jobless-rate threshold for considering an increase, especially if inflation stays below the central bank’s 2 percent target. The benchmark rate has been in a range of zero to 0.25 percent since December 2008.

The odds of policy makers increasing the interest-rate target by January 2015 rose to 22 percent yesterday, based on data compiled by Bloomberg from futures contracts. They were 11 percent at the end of November.

Increasing Treasury yields have driven mortgage rates higher. Thirty-year (USGG30YR) fixed mortgage rates rose to 4.56 percent on Dec. 26, the highest since Sept. 13, according to Bankrate.com. The 2013 low was 3.4 percent on May 1.

Reversal Signal

Yields on Treasury notes due in three to seven years may be poised to reverse increases, a technical indicator signaled. Fourteen-day relative-strength index readings for seven-, five-and three-year securities were all above the 70 level that shows the yields may have jumped too much, too fast, and be about to change direction.

The readings yesterday were 74.1 for seven-year yields, 75.3 for five-year yields and 72.7 for three-year yields.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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