Treasuries Fall as Fed Plan Boosts Inflation Indicators

Treasury 30-year bond yields climbed the most in three years after Federal Reserve Chairman Ben Bernanke’s pledge to keep adding stimulus even as the economy improves spurred concern inflation will accelerate.

The yield gap between 10- and 30-year Treasuries widened to the most in a year yesterday amid bets the value of longer-term fixed-income holdings will erode more over time. Relative yields on mortgage securities slid to the lowest on record after the Fed said Sept. 13 it would expand its holdings with open-ended monthly purchases of $40 billion of the debt. The U.S. will sell 10-year Treasury Inflation Protected Securities next week.

“Treasuries are worried about inflation on the heels of open-ended stimulus,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York one of 21 primary dealers that trade with the Fed. “That’s why you’ve seen this major move. It certainly wasn’t friendly to the long end.”

Yields on 30-year bonds increased 26 basis points, or 0.26 percentage point, this week in New York, according to Bloomberg Bond Trader prices. It was the biggest jump since August 2009. Yields touched 3.11 percent, the highest level since May 4. The price of the 2.75 percent security due in August 2042 slumped 5 2/32, or $50.63 per $1,000 face amount, to 93 13/32.

Benchmark 10-year note yields added 20 basis points, the most since the five days ended March 16, to 1.87 percent this week. They touched 1.89 percent, the highest since May 10.

Yield Curve

The difference in yields between 10- and 30- year Treasuries, called the yield curve, touched 1.23 percentage points yesterday, the most since September 2011. Thirty-year bonds, because of their long maturity, are more sensitive to inflation than shorter-dated Treasuries.

“The shift in the Fed’s stance toward inflation justifies the move we’ve seen, and then some,” Mike Pond, head of global inflation-linked research in New York at the primary dealer Barclays Plc, said yesterday.

The 30-year break-even rate, an indicator of traders’ outlook for annual inflation over the next three decades, widened yesterday to the most in 13 months. The rate, the yield difference between long bonds and comparable TIPS, reached 2.67 percentage points, the most since August 2011. The 2012 average is 2.30 percentage points.

Bernanke is trying to bring down an unemployment rate stuck above 8 percent since February 2009.

The Federal Open Market Committee said after a two-day meeting it would continue buying assets, undertake additional purchases and employ other policy tools as appropriate “if the outlook for the labor market does not improve substantially.”

‘Considerable Time’

The FOMC said in a statement it would probably hold its benchmark interest rate at virtually zero “at least through mid- 2015.” It said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time” after economic growth builds momentum.

Stocks and commodities rose as risk appetite gained. The Standard & Poor’s 500 (SPX) Index advanced 1.9 percent for the week, and S&P’s GSCI index of raw materials climbed 2.6 percent.

“Leaving their purchases open-ended and extending their guidance means a steeper yield curve, as there is more inflation risk,” said Sean Murphy, a trader in New York at the primary dealer Societe Generale. “The need to come out with the operation at all is alerting everyone that there is a long road in this recovery and there are still many things that need to be addressed.”

Mortgage Bonds

A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value fell about one basis point to 92 basis points higher than an average of five- and 10-year Treasury rates yesterday in New York. It was the narrowest spread since at least 1984.

The U.S. consumer price index rose in August 0.6 percent from the previous month, the biggest increase since June 2009, and advanced 1.7 percent from a year earlier, Commerce Department data showed yesterday. The figures matched the forecasts in a Bloomberg News survey.

Treasuries were the most volatile among developed-market government bonds yesterday, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.

Daily volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, reached $464 billion on Sept. 13, the highest level in 13 months. Volume has averaged $262 billion over the past five years.

Less Expensive

U.S. government securities traded at the least expensive level in three weeks yesterday, according to the 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation. The gauge was at negative 0.81 percent, the least costly since Aug. 21. A negative reading shows investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.73 percent.

The Treasury auctioned $66 billion in notes and bonds this week, including $13 billion in 30-year debt on Sept. 13 an hour before the Fed issued its statement. The sale drew a yield of 2.896 percent, versus a forecast of 2.929 percent in a Bloomberg News survey of primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.68, versus 2.41 at the July sale.

The government sold $32 billion of three-year notes on Sept. 11 at a bid-to-cover ratio of 3.94, the highest on record. It auctioned $21 billion in 10-year notes the next day at a ratio of 2.85, versus an average 3.09 at the previous 10 sales.

Net Long

Hedge-fund managers and other large speculators increased their net-long position in 30-year bond futures in the week ended Sept. 11, before the Fed meeting, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 20,088 contracts on the Chicago Board of Trade. Net-long positions rose by 5,457 contracts, or 37 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report. As recently as the week ended Aug. 28, the speculators had a net short position of 4,129 contracts.

The U.S. will sell $13 billion of 10-year TIPS Sept. 20. The previous sale of the securities, a $15 billion offering on July 19, drew a record low yield of negative 0.637 percent.

TIPS have returned 6.2 percent this year, versus 1.7 percent for Treasuries that do not provide inflation protection, according to Bank of America Merrill Lynch indexes. Thirty-year bonds gained 0.9 percent, the gauges showed.

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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