Treasury 10-year note yields traded at almost a two-month high before Federal Reserve Chairman Ben S. Bernanke discusses the economic outlook in congressional testimony this week.
The benchmark yields rose the past three weeks, the longest streak this year, as the economy showed signs of strength, prompting speculation the Fed may taper its monetary-stimulus program, known as quantitative easing. Fed Bank of Chicago President Charles Evans said the U.S. economy has improved “quite a lot.” The Fed publishes minutes of the April 30 to May 1 policy meeting on May 22, while Bernanke will testify that day on the economic outlook.
“Will-they-or-won’t-they-taper speculation has become the dominant theme in the Treasury market, regarding the Fed,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “We’ve gotten to the point where the market is oversold. Absent a catalyst, we are hovering in this trading range until Bernanke’s testimony or the Fed minutes gives us news.”
U.S. 10-year yields were little changed at 1.97 percent as of 5 p.m. New York time, after climbing five basis points last week. The yield touched 1.98 percent on May 15, the highest since March 15. The price of the 1.75 percent note due in May 2023 traded at 98 1/8.
U.S. policy makers must address debt loads projected to rise later this decade to avoid a 2013 downgrade, even as the latest budget projections are “credit positive,” according to Moody’s Investors Service.
The U.S. budget deficit will drop to $378 billion in 2015 from a record $1.4 trillion in 2009, according Congressional Budget Office data. The federal government will post an $642 billion deficit this year, the first time in five years that the shortfall has been less than $1 trillion. Moody’s said Sept. 11 that the U.S.’s top Aaa rating would likely be cut to Aa1 if an agreement on the debt ratio isn’t reached.
While 10-year yields rose last week, they are 60 basis points higher than similar-maturity German bunds. That’s about double the average since 2003. The U.S. rate is five basis points more than that on U.K. gilts, versus an average of about 30 basis points below during the same period.
“The Treasury market is cheaper than almost any other comparable market on a relative value basis,” Jim Vogel, an interest-rate strategist at Memphis, Tennessee-based FTN Financial, said by phone May 15. “There is the thought out there that Treasuries are expensive when in reality they offer the most value.”
Treasuries have handed investors a loss of 1.1 percent this month, according to Merrill Lynch bond indexes. German bunds have lost 0.6 percent, the indexes show.
Investors reversed to a net-short position from a net long in U.S. 10-year note futures in the week ended May 17, the first time since the period ended March 22 that they are betting prices will fall, according to U.S. Commodity Futures Trading Commission data. Speculative short positions outnumbered longs by 11,153 contracts on the Chicago Board of Trade. The previous week, traders were net-long 37,956 contracts.
The Fed purchases $85 billion of Treasury and mortgage debt a month, and bought $1.5 billion of securities maturing between February 2036 and February 2043 today.
“Currently, we have the appropriate monetary policy in place,” Evans said in a speech in Chicago today. “The U.S. economy seems to be performing pretty well right now.”
Evans said he expects to see “self-sustaining growth” at “escape velocity” in 2014. “We would like to see inflation closer to our objective,” he added.
The difference between yields on 10-year notes and similar-maturity TIPS shrank to 2.24 percentage points, at almost the 2.23 percentage points reached May 17, 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 last week.
Volatility rose last week 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 on May 17, 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.
Existing home sales increased 1.4 percent in April after a 0.6 percent decline the previous month, according to the median estimate in a Bloomberg survey of economists before a May 22 report from the National Association of Realtors.
“The market will be focused on Bernanke speaking on Wednesday,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “There’s a lot of chatter about tapering and QE, so people will be listening if Bernanke gives any hints on that.”
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