Treasuries Decline as Fed’s Dudley Dims Stimulus View

Treasuries fell, pushing 10-year yields up from almost a record low, as Federal Reserve Bank of New York President William Dudley said he doesn’t currently see the need for additional economic stimulus.

The yield on the seven-year note rose from a record low before the U.S. sells $29 billion of the notes in its third auction of coupon-bearing debt this week. Yields fell earlier as European leaders meeting in Brussels failed to agree on joint debt sales. Dudley said U.S. economic growth will “pick up a little bit,” reducing the need for more Fed purchases through quantitative easing or Operation Twist programs.

“He is one of the anchors on the dovish camp and seeing him less dovish regarding Twist and QE is a near-term negative for Treasuries,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “There’s no reason to think this auction will go poorly. There’s incredible demand for safe-haven assets, even at these low yields.”

The benchmark 10-year yield climbed four basis points, or 0.04 percentage point, to 1.77 percent at 11:08 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent security due in May 2022 fell 11/32, or $3.44 per $1,000 face amount, to 99 25/32. The yield touched 1.71 percent, approaching the record low 1.6714 percent set Sept. 23.

The yield on the 30-year bond rose four basis points to 2.86 percent.

Yield Levels

The seven-year yield rose four basis points to 1.19 percent after dropping to a record 1.1301 percent. The notes being sold today yielded 1.22 percent in pre-auction trading. The securities were sold at a record-low yield of 1.347 percent at the previous auction on April 26.

“Trades of the last few weeks have certainly been driven out of Europe and so the move feels less like the market is trying to price in a concession to the seven-year and is more a response to the absence of any major developments,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

This week’s note offerings, combined with the May 17 auction of $13 billion in 10-year Treasury Inflation Protected Securities, will raise $52.9 billion of new cash, as maturing securities held by the public total $59.1 billion.

“The economy, I think generally, is healing, but very slowly,” Dudley said in an interview with CNBC, according to its website. “If we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front.”

Policy Gathering

The Fed will hold its policy meeting next month. The U.S. central bank bought $2.3 trillion of bonds in two rounds of quantitative easing from December 2008 to June 2011 to boost the economy.

“If that’s the case, it would be a bit of a disappointment to the market,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp., referring to Dudley’s comments. “We still have another month of the European crisis and economic data to get through and those things can still change.”

The central bank bought $1.8 billion of Treasuries due from February 2036 to August 2041 today, according to the Fed Bank of New York’s website. The purchases are part of the central bank’s program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to support the economy.

Bill Gross, co-chief investment officer and founder of Newport Beach, California-based Pacific Investment Management Co., commented on monetary policy in a Twitter post.

“Fed’s Dudley less dovish,” he wrote. “QE III now. Depends on Euroland, inflation & jobs. 50/50.”

Bond Rally

Treasuries have rallied since March on speculation Greece will abandon the euro as it combats a recession, leading other nations in the currency bloc to consider doing the same.

Volatility rose yesterday to 73.7 basis points from 70.8 basis points the previous day, according to Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options. The gauge is below the one-year average of 87.9 basis points.

Trading volume rose yesterday above the 2012 average of $242 billion. About $280 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker. Volume reached $439 billion on March 14, the highest since August.

German Views

Germany has “huge difficulties” with France’s call for joint borrowing by euro governments, Chancellor Angela Merkel told reporters in Brussels early today after six hours of talks. European leaders also called on Greece to stick with budget cuts needed to stay in the euro.

Ten-year yields will increase to 2.45 percent by year-end, according to the average forecast in a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

The yield touched a 2012 high of 2.4 percent on March 20 and a low of 1.69 percent on May 17.

Treasuries returned 1.2 percent this month as of yesterday, Bank of America Merrill Lynch indexes show, reflecting demand for the relative safety of U.S. debt. Investors tracking the MSCI All-Country World Index of stocks lost 8.3 percent during the same period, including reinvested dividends.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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