Treasury Futures Near Lowest Since October Before Housing

Treasury 10-year futures contracts were about 0.2 percent from the lowest level since October before a government report economists said will show U.S. homebuilding climbed to a three-month high.

Ten-year notes dropped for a ninth day yesterday, the longest stretch since June 2006, as investors bet a strengthening economy will diminish the refuge appeal of U.S. government securities. A 10th decline today would be the longest stretch since April 1974 following the OPEC oil embargo. Markets were closed in Japan today for a holiday.

“The data have been getting better,” said Roger Bridges, who oversees the equivalent of $15.9 billion of debt as the Sydney-based head of fixed income at Tyndall Investment Management Ltd., a unit of Nikko Asset Management Co. “U.S. 10- year notes still look expensive.” Bridges said he is holding fewer Treasuries than the percentage in the benchmark he uses to gauge performance.

Ten-year Treasury futures contracts for June delivery rose 2/32, or 63 cents per $1,000 face amount, to 128 1/32 as of 1:58 p.m. in Singapore. They were as low as 127 25/32 earlier in Asian trading, a level not seen since Oct. 28.

Yields (USGG10YR) on 10-year notes rose as much as 10 basis points, or 0.10 percentage point, to 2.39 percent yesterday, the most since Oct. 28. The rate was 2.38 percent at the end of the day in New York. They are still less than the average of 3.87 percent over the past decade.

U.S. Housing

The increase helped push up real estate borrowing costs, with the average U.S. 30-year fixed mortgage rate rising to a four-month high of 4.05 percent, according to Bankrate.com in North Palm Beach, Florida. The rate is 1.67 percentage points more than 10-year yields, the narrowest difference since July.

Housing starts probably rose to a 700,000 annual rate last month from a 699,000 pace in January, according to the median estimate of 80 economists surveyed by Bloomberg News. The figure would be the strongest reading since November’s three-year high of 702,000.

Treasuries have fallen enough that they are beginning to attract investors.

“Yields overshot,” said Will Tseng, who trades the securities at Taipei-based Shin Kong Life Insurance Co., which has the equivalent of $52.1 billion in assets. “I will definitely jump in” if rates rise further. Tseng said he is planning to buy 10-year Treasuries at 2.4 percent.

Volatility

Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, rose to 92.3 basis points yesterday. It was the highest level this year.

The 14-day relative strength index for 10-year note yields was at a level indicating they may not rise much further. The index was 76.5 yesterday, exceeding 70 for a fourth day. A reading of more than 70 suggests to some traders that rates may be about to reverse direction.

Futures contracts trimmed losses today as the MSCI Asia Pacific excluding Japan Index of shares declined 0.5 percent, dropping for a fourth day.

Treasuries fell after the Federal Reserve raised its assessment of the economy last week, reducing speculation about additional asset purchases known as quantitative easing.

“It feels like continued liquidation,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of the 21 primary dealers that trade with the Fed. “We’ve seen a dramatic move in a quick period of time.”

Policy Outlook

Fed Bank of New York President William C. Dudley said yesterday that policy makers may raise interest rates sooner or later than 2014, in a speech in Melville, New York. Fed said in its statement last week that it will probably keep the benchmark close to zero through at least the later part of that year.

Real yields, or what investors get after inflation, are improving. The benchmark that the Fed targets, the annual change in the price index for personal consumption expenditures, is at 2.4 percent, two basis points more than 10-year Treasury rates. The real yield of negative two basis points compares to negative 1.19 percentage points in October.

The central bank in January set a target of 2 percent for the gauge.

Using the Labor Department’s consumer price index, the yield after inflation is negative 52 basis points, about a quarter of the deficit in October.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net

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