NEW YORK: Treasury 10-year yields touched the highest level in more than two years as signs of a quickening economic recovery boosted speculation the Federal Reserve will keep reducing monthly debt purchases.
The benchmark yield rose above three percent for the first time in three months as investors weighed the Fed’s decision last week to reinforce its commitment to low interest rates while starting to cut bond-buying in January. Citigroup Inc’s Economic Surprise Index climbed on Thursday to the highest since October, signalling an improving economy.
“Rates will be continually rising at a gradual pace,” said Jennifer Vail, head of fixed-income research in Minneapolis at US Bank Wealth Management, which oversees $112bn. “As you see data prints that show the strength of the economy, that’s how you’ll see the upward drift in yields. We don’t think rates will sell off aggressively from here.”
The 10-year yield advanced two basis points, or 0.02 percentage point, to 3.01 percent at 2.32pm New York time, according to Bloomberg Bond Trader prices. It rose three basis points earlier to 3.02 percent, the highest since July 26, 2011. The yield has climbed 12 basis points since December 20 in its sixth straight weekly increase, the longest stretch in more than six months. The price of the 2.75 percent security due in November 2023 fell 1/8, or $1.25 per $1,000 face amount, to 97 26/32.
“People wanted to look at the other side of three percent and see if there were stop-loss orders” that would have propelled yields higher should investors have rushed to sell securities that had fallen in price, said William O’Donnell, head US government-bond strategist at primary dealer RBS Securities Inc in Stamford, Connecticut. Investors place stop-loss orders to automatically sell assets when a threshold is reached.
The two-year note yield fell two basis points to 0.39 percent. The security, which isn’t included in the Fed’s monthly program of asset buying, headed for a fifth weekly decline, the longest since September.
Treasury trading volume at ICAP Plc, the largest inter- dealer broker of US government debt, slid to $72.7bn on Thursday, the lowest since December 24, 2012. This year’s daily average is $310bn. Volume on Friday rose to $111.8bn as of 2.01pm in New York
US government securities have lost 3.3 percent this year, according to the Bloomberg US Treasury Bond Index. That compares with a 0.3 percent loss by the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index.
The yield difference between 10-year Treasuries and comparable German government debt swelled to 109.8 basis points Thursday, the widest since 2006, as data shows the US economy is accelerating faster than the euro region. The gap was 105 basis points on Friday. It was 71.7 basis points on October 22.
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, after reaching 0.63 percent on September 5, the least expensive since May 2011, according to a Columbia Management model. The current reading is above the average of 0.21 percent over the past decade and shows investors see bonds as close to fairly valued.
The policy-setting Federal Open Market Committee said after its December 17-18 policy meeting it will begin reducing its $85bn of monthly asset purchases in January amid “growing underlying strength” in the economy.
WP-Bloomberg
