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Treasuries Fall Most Since Start of Year as Refuge Demand Eases

Treasury 10-year note yields rose the most since the first week of the year as the European Central Bank said banks will repay more of its loans than forecast and a strengthening housing market reduced the haven appeal of U.S. government debt.

The benchmark security fell the most since Oct. 17 yesterday after the ECB data spurred optimism the worst of the European debt crisis may be over, capping the biggest weekly decline since the five days ended Jan. 4. The slide in prices came before the first Federal Reserve policy meeting of the year beginning Jan. 29 and the release of the January employment report on Feb. 1. The U.S. will also auction $99 billion in two- , five- and seven-year notes next week.

“It’s been a global risk-on trade,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. The ECB data “is certainly regarded as a favorable indicator,” Sullivan said. “We’ve entered a higher range in Treasury yields.”

The 10-year note yield rose 11 basis points, or 0.11 percentage point, to 1.95 percent, according to Bloomberg Bond Trader pricing. The 1.625 percent security due in November 2022 declined 30/32, or $9.38 per $1,000 face amount, to 97 3/32.

The 10-year note is likely to trade in a range with yields between 1.80 percent and 2.06 percent, Sullivan said.

Yesterday’s selloff surpassed the eight-basis-point rise in yields posted on Jan. 2, when Congress broke an impasse about how to avert the so-called fiscal cliff by passing legislation skirting income-tax increases for more than 99 percent of households. The U.S. House of Representatives voted on Jan. 23 to temporarily suspend the nation’s borrowing limit.

European Relief

The ECB said banks will pay back 137.2 billion euros ($184.4 billion) of its three-year loans, so-called Longer-Term Refinancing Operations, next week. That compares with the median forecast of 84 billion euros in a Bloomberg News survey of economists.

The Frankfurt-based ECB flooded financial markets with two tranches of three-year loans a year ago to avert a credit crunch after banks stopped lending because of Europe’s sovereign-debt crisis. This was the first opportunity for early repayment by the banks.

“Banks can repay weekly now, so it should have a risk-on effect in the near term,” said Craig Collins, managing director of rates trading at Bank of Montreal in London. Treasury “rates are going to go higher.”

Bond Buying

The Fed is holding a policy meeting for the first time since committing to buy $45 billion a month in Treasury securities at its previous gathering Dec. 12.

The 10-year note yield rose to a 7-month-high on Jan. 3 after minutes of the December meeting showed that participants disagreed on how long the Fed should continue its purchases, spurring speculation the central bank could end the stimulus program earlier than many investors anticipate.

Policy makers were “approximately evenly divided” between participants who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date.

Fed officials are gathering as the property market has shown signs of recovery and homebuilding has rebounded as low borrowing costs spur buyer demand. Builders sold 367,000 homes in 2012, the most in three years and the first annual increase in seven, Commerce Department figures showed yesterday.

“We think the housing recovery is going to continue,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trade with the Fed. “The long end has been selling off.”

Employment Growth

Claims for jobless benefits fell to a five-year low for a second week. The Labor Department will say Feb. 1 that the economy added 155,000 jobs this month, according to the median estimate of forecasters in a Bloomberg News survey. The unemployment rate is expected to remain at 7.8 percent.

The Federal Open Market Committee said in December that interest rates will stay low “at least as long” as the jobless rate stays above 6.5 percent and if inflation is no more than 2.5 percent.

Treasuries returned 2.2 percent in 2012, versus 11 percent for bonds in an index of investment-grade and high-yield securities, according to Bank of America Merrill Lynch data. Company debt gained 6.8 percent in 2011, 11 percent in 2010 and 26 percent in 2009, the figures show.

The U.S. sold $15 billion of Treasury Inflation-Protected Securities on Jan. 24 at a yield of negative 0.63 percent, the highest since May. The past seven offerings of the securities, beginning in November 2011, have been sold with negative yields.

Treasury will auction $35 billion in two-year notes, an equal amount in five-year notes and $29 billion in seven-year notes on three consecutive days starting Jan. 28.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

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

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