Treasuries are off to their worst start in nine years amid signs the U.S. economy is strengthening and Europe is moving closer to resolving its sovereign-debt crisis.
Yields on benchmark 10-year notes climbed 16 basis points, or 0.16 percentage point, the biggest weekly increase since the five days ended Dec. 23, as reports showed fewer Americans than forecast filed for unemployment benefits and home sales rose for a third month in December. The refuge appeal of Treasuries eased as Greek officials held debt-swap talks and European bond sales saw increased demand. Policy makers are expected by analysts to say they’ll keep borrowing rates low as the economy gathers momentum when Federal Open Market Committee meets Jan. 24-25.
“The better sentiment out of Europe and the improving domestic economy is weighing on Treasuries,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “Still, there is a lot of uncertainty, and despite the positive signs in the economy we are still at very low rates because there is so much that is unresolved.”
U.S. government securities have lost 0.342 percent this year, the most since a 0.693 percent loss in 2003, according to Bank of America Merrill Lynch Indexes. The benchmark 10-year yield rose five basis points to 2.02 percent yesterday in New York, according to Bloomberg Bond Trader prices.
Treasuries finished 2003 returning 2.25 percent after the weak start and have posted annual gains every year but one since 2009, when they fell 3.7 percent. U.S. corporate bonds returned 0.5 percent this year and German bunds fell 0.1 percent, the indexes show.
Initial jobless claims plunged to 352,000 in the week ended Jan. 14, the lowest level since April 2008, the Labor Department said on Jan. 19. A Federal Reserve report on Jan. 18 showed factory output increased.
The difference between two- and 10-year yields widened four basis points to 1.78 percentage points after touching 1.79 percentage points, the most since Dec. 13. The spread was as narrow as 1.47 percentage points on Oct. 4.
“The lack of blowups in European sovereign debt have allowed calm to erupt, and that has weighed on Treasuries,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed income assets. “Home sales are improving, though from very poor levels, which underlies the improving data we’ve had of late,”
The Citi Macro Risk Index dropped to a five-month low of 0.601 on Jan. 19, showing increased demand for higher-yielding assets.
“There is some significant traction in the labor market,” said Richard Gilhooly, an interest-rate strategist at Toronto- Dominion Bank’s TD Securities Inc. in New York. “There is beginning to be some consistency and some acceleration in the U.S. economic numbers. Once we get through the first quarter, you should get a big spike in Treasury yields.”
Sales of previously owned U.S. homes rose to the highest level since January 2011, with purchases increasing 5 percent to a 4.61 million annual rate, the National Association of Realtors said yesterday in Washington. The pace was less than the 4.65 million median forecast of 75 economists surveyed by Bloomberg News.
Even as core consumer prices are running at almost the Fed’s ideal of about 2 percent, investors are snapping up inflation protected debt for insurance against a risk that price levels rebound. The U.S. sold a record $15 billion in 10-year Treasury Inflation Protected Securities on Jan. 19 at a negative yield for the first time.
The TIPS were auctioned at a so-called high yield of negative 0.046 percent, compared with a forecast of negative 0.027 percent, the average estimate in a Bloomberg News survey of eight of the Fed’s 21 primary dealers that are required to bid on U.S. debt sales. The last four sales of five-year TIPS were at negative yields.
Investors should buy Treasuries as the yield approaches 2.05 percent, amid concern that Europe may not be able to solve its sovereign-debt crisis, said Larry Milstein, managing director in New York of government- and agency-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.
“The U.S. numbers look good,” said Milstein. “I’m still not convinced with respect to Europe.”
The World Bank said this week that the U.S. economy will expand 2.2 percent in 2012, while the euro area will contract 0.3 percent.
The 10-year yield will advance to 2.58 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.
“Weak-but-positive growth should allow rates to grind higher, barring an increase in European stress,” according to the report by Royal Bank of Canada analysts including Michael Cloherty, the head of U.S. rates strategy for RBC Capital Markets LLC in New York.
Greece’s government and private creditors convened yesterday for a third session of talks on how to reduce the nation’s debt and avert a collapse of the economy.
“The European situation may be dislocating itself some from the Treasury market,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “As the complexion gets better in Europe there is less need for the flight-to-quality to trade. If we didn’t have the European situation we would be further north of 2 percent on the 10-year note. We’ve had no new bad news, which has given investors cover to sell Treasuries.”
Yields indicate investors are becoming more willing to lend. The three-month London interbank offered rate for loans in dollars was at 0.561 percent on Jan. 19, a second weekly decline.
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