Treasuries Drop as Consumer Confidence, Indicators Top Forecasts

Treasuries declined after a measure of consumer confidence in May reached an almost six-year high and an index of leading economic indicators topped forecasts, as Federal Reserve officials debate the pace of asset purchases.

The yield on the 10-year note climbed from almost the lowest level in a week as Fed Bank of San Francisco President John Williams said yesterday the central bank may begin to slow bond purchases as early as this summer. The difference between yields on 10-year notes and similar-maturity inflation-indexed debt shrank to the lowest level since August, indicating reduced concern about rising prices. Hedge-fund managers and other large speculators held a net-short position in 10-year note futures for the first time in almost two months.

“The Fed is going to continue its public debate about when to taper, without actually tapering,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA Inc., one of 21 primary dealers that trade with the Fed. “The 10-year note could gradually move back to the lows. We’re right now from 1.85 to 1.98 percent.”

U.S. 10-year yields rose seven basis points, or 0.07 percentage point, to 1.95 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due in May 2023 fell 20/32, or $6.25 per $1,000 face amount, to 98 6/32. The yield touched 1.86 percent yesterday, the lowest level since May 10. It increased five basis points on the week.

Ten-year yields have risen for three consecutive weeks, from 1.66 percent on April 26, in the longest stretch of increases since December.

Futures Bets

Volatility rose to the highest level since March. Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries increased to 61.33 basis points, the highest level since March 22. The index fell to an all-time low of 48.87 basis points on May 9. The measure averaged 62.5 basis points during the past 12 months.

Investors reversed from a net-long position to a net-short position in 10-year note futures in the week ending May 14, the first time in a net-short position since March 22, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 11,153 contracts on the Chicago Board of Trade. Last week, traders were net-long 37,956 contracts.

Meanwhile, in 30-year bond futures, speculative long positions, or bets prices will rise, outnumbered short positions by 14,638 contracts on the Chicago Board of Trade. Net-long positions rose by 7,149 contracts, or 95 percent, from a week earlier.

Issuance of Treasury notes, bonds and TIPS could plunge if the Congressional Budget Office’s estimate of smaller federal deficits proves accurate, wrote Michael Schumacher, head of global rates strategy at UBS AG, in a report dated yesterday. Net issuance totaled $667 billion between Oct. 1 and April 30, exceeding the CBO’s predicted budget deficit with five months remaining in the fiscal year, he wrote.

Budget Update

A report May 14 showed the U.S. budget deficit will shrink this fiscal year to $642 billion, the smallest shortfall in five years, according to the nonpartisan CBO. The agency reduced its estimate of the likely deficit, citing stronger-than-expected tax receipts. In February, it had projected a $845 billion deficit for the 2013 fiscal year, which ends Sept. 30. Last year’s deficit was $1.1 trillion.

Net issuance was $364 billion in the first four months of calendar 2013, suggesting that Treasury needs another $176 billion of net issuance this year, the UBS strategist, noting that amounts to a 21 percent decrease in gross issuance.

The difference between yields on 10-year notes and similar-maturity TIPS shrank to 2.23 percentage points, the least since Aug. 9, according to Bloomberg data. The consumer price index decreased 0.4 percent, the biggest decline since December 2008, after falling 0.2 percent in March, according to Labor Department figures released yesterday.

TIPS Sale

The Treasury announced yesterday it will sell $13 billion in 10-year TIPS on May 23. It sold an equal amount of the securities on March 21 at a yield of negative 0.602 percent.

TIPS handed investors a loss of 1.9 percent in May through yesterday, already making this month the worst since December 2009, according to Bank of America Merrill Lynch indexes. Treasuries overall have declined 0.7 percent.

Ten-year note yields rose to 1.98 percent on May 15, the highest since March 15, as U.S. officials weighed whether the economy is strong enough for them to curtail their monthly purchases of $85 billion of government and mortgage debt. The average for the year to date is 1.87 percent.

“They are going to taper, but we don’t know when or the makeup,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “That question and uncertainty will remain with the market for several months further.”

Fed Policy

The Fed said after a policy meeting on May 1 it will maintain stimulus as long as the outlook for inflation doesn’t exceed 2.5 percent and as unemployment remains above 6.5 percent. The central bank will release minutes of the April 30 to May 1 policy makers meeting on May 22.

The central bank bought $5.5 billion of securities maturing between February 2018 and February 2019 today, according to the New York Fed’s website.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 83.7 in May, the highest since July 2007, from 76.4 the prior month, a report today showed. The median forecast in a Bloomberg survey was for a gain to 77.9.

The Conference Board’s gauge of the outlook for the next three to six months climbed 0.6 percent in April after falling a revised 0.2 percent in March that was steeper than previously reported, the New York-based group said today. The median forecast of economists surveyed by Bloomberg called for a 0.2 percent increase.

“There’s this ongoing debate about Fed exit strategy and how it’s going to be handled,” said Dan Mulholland, head of U.S. Treasury trading in the capital-markets unit of BNY Mellon Corp. in New York. “We need to see further employment growth. There are a lot of other things that need to happen” for tapering to occur.

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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