Treasury 10-Year Yields Rise to Highest in Four Months
Treasuries (YCGT0025) fell for a sixth day, the longest losing streak since October, as the Federal Reserve’s raising of its assessment of the U.S. economy damped the refuge appeal of U.S. government debt at a $13 billion auction of 30-year bonds.
The securities were sold at yield of 3.383 percent, the highest since August. The Fed’s 21 primary dealers that are required to bid at the sale were awarded 56.3 percent of the bonds, compared with an average of 52 percent for the past five sales. Ten-year yields climbed to a four-month high after the Fed’s statement yesterday damped bets the central bank would buy more debt under a third round of quantitative easing.
“The selloff in the Treasury market has been fast and furious,” said George Goncalves, head of interest-rate strategy at the primary dealer Nomura Holdings Inc. “A great deal of confidence has been shaken out of the market in the past few days. The correction in Treasuries was long overdue.”
The yield on the 30-year bond rose 14 basis points to 3.4 percent at 5:27 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 3.42 percent, the highest level since Oct. 28. The price of the 3.125 percent securities due in February 2042 tumbled 2 15/32, or $24.69 per $1,000 face amount, to 94 27/32.
The benchmark 10-year note’s yield increased 14 basis points to 2.27 percent. It gained as much as 16 basis points and touched 2.29 percent, the biggest intraday jump since Oct. 27 and the highest level since Oct. 31. The yield had traded between 1.79 percent and 2.09 percent this year until yesterday.
‘Fast and Furious’
“The Street bought a large amount in the auction and there wasn’t as big of a customer bid here so they are a little long,” said Thomas Connor, president and head of trading at Pierpont Securities LLC in Stamford, Connecticut. “The Fed made no mention of QE3, and no additional twist. Employment is doing better. We will have to make a fundamental yield adjustment.”
Today’s high auction yield compared with a forecast of 3.393 percent in a Bloomberg News survey of eight primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.7, compared with an average of 2.63 for the previous 10 sales.
Indirect bidders, a class of investors that includes foreign central banks, bought 29 percent of the bonds. That compared with an average of 31.2 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 14.7 percent, versus an average of 16.5 percent for the past 10 auctions.
Loss for 2012
U.S. 30-year bonds have lost 6 percent this year, compared with a 0.9 percent decline in the broader Treasury market, according to Bank of America Merrill Lynch indexes. Long bonds returned 36 percent in 2011, more than triple the 9.8 percent gain by Treasuries overall.
The Fed refrained yesterday from new moves to cut borrowing costs, saying the U.S. labor market is gaining strength.
Ten- and 30-year Treasury yields have climbed the most over the past two days since Oct. 27, when U.S. bonds tumbled after European leaders’ efforts to resolve their debt crisis fueled appetite for higher-yielding assets. The 10-year yield gained 24 basis points, and the 30-year yield rose 23.
Convexity ‘Not Dead’
“The big moves are a big sign that convexity is not dead,” said Nomura’s Goncalves. “Everyone who tells you that it didn’t exist was looking in the wrong place.”
Convexity is a measure of the rate of change of a bond’s duration as a result of changes in interest rates. Duration is a measure of a bond’s price sensitivity to changes in interest rates. Mortgage bonds are described as negatively convex, meaning that as interest-rates rise, their duration increases as well because fewer homeowners are likely to refinance.
Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates soared to the highest in almost four months, suggesting borrowing costs may jump from about record lows. Fannie Mae’s current-coupon 30-year bonds climbed 0.16 percentage point to 3.17 percent as of 4:15 p.m. in New York, the highest since Nov. 28 after an increase of 0.12 percentage point yesterday, according to data compiled by Bloomberg.
The yield on the 10-year note dropped from a 2011 high of 3.77 percent on Feb. 9 that year to a record low 1.67 percent on Sept. 23 as investors sought haven amid concern the U.S. economy faced headwinds and Europe’s debt crisis was worsening.
This week’s climb in yields came amid an improving economy and lower prospects of more Fed stimulus.
No ‘Sustained Reversal’
“This is not a sustained reversal,” said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. in Toronto. “A lot of this is predicated on the overall bullishness permeating the market landscape right now.
Treasury 10-year yields will fall to 1.75 percent by June and 1.5 percent by the end of the year amid prospects for less fiscal stimulus and cuts in federal spending, Rosenberg said.
Scott Minerd, chief investment officer of Guggenheim Partners LLC, who oversees more than $125 billion from Santa Monica, California, said 10-year yields need to breach 4 percent to break out of the “long-term bullish bond trend.”
“It’s a near term sea change,” Minerd said. “But we have seen the low in interest rates. We are clearly bottoming out in rates and setting the stage for a generational bear market. Once 4 percent on the 10-year note is breached, we are off to the races.”
Volatility jumped from the lowest level in more than four years. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, increased to 89.7 basis points today, the highest since Jan. 3. It reached 69.9 basis points on March 12, the least since July 2007. The reading means traders expect a yield range of 89.7 basis points on an annualized basis in the next month.
Treasury market volume climbed. About $437 billion of U.S. debt changed hands through ICAP Plc, the world’s largest interdealer broker, the most since Aug. 10. The average full-day volume over the past year is $270 billion.
Valuation measures show government debt is becoming less expensive. The term premium, a model created by economists at the Fed, was negative 0.4 percent today, the least since October. The figure touched negative 0.79 percent on Feb. 2, the most expensive ever, and compares with the average of positive 0.56 percent over the past decade. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
The gap between yields on two- and 30-year Treasuries, called the yield curve, rose to 301 basis points, the most since Oct. 28.
The 10-year break-even rate, a gauge of the outlook for consumer prices derived from the difference between yields on conventional and inflation-linked notes, rose to 2.39 percentage points, a level last seen on Aug. 2.
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