Treasuries End Longest Losing Streak in 4 Years as Fed Bets Ebb
Treasuries rose, breaking the longest streak of weekly losses since 2009, amid skepticism the Federal Reserve is about to slow its bond-buying program designed to hold down borrowing costs and spur the economy.
Ten-year note yields dropped for the first week since April after reaching a 14-month high as investors weighed whether the economy is strengthening enough for policy makers to consider reducing their quantitative-easing stimulus. The U.S. sold $66 billion in notes and bonds to below-average demand. Fed Chairman Ben S. Bernanke and the policy-setting Federal Open Market Committee meet June 18-19.
“It’s the calm before the storm for the Treasury market,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the central bank. “The reality is the bloodletting could continue a little bit longer if the Fed disappoints at the next meeting. The Fed has control over the tenor and the tone of the Treasury market. The area where the street is still adjusting expectations is the speed of tapering.”
U.S. 10-year yields fell four basis points, or 0.04 percentage point, to 2.13 percent this week in New York, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due May 2023 advanced 3/8, or $3.75 per $1,000 face amount, to 96 5/8.
The benchmark yield climbed to 2.29 percent on June 11, the highest since April 2012, after reaching a 2013 low of 1.61 percent May 1. It rose for the six weeks ended June 7, the longest stretch since May 2009.
Thirty-year (USGG30YR) bond yields declined three basis points to 3.31 percent. They increased to 3.43 percent on June 11, also the highest since April 2012, before snapping a six-week losing streak, their longest since May 2009.
“The market is in the process of refining Fed policy expectations,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. Investors are curtailing “expectations for the Fed to be more aggressive on the tapering front,” Lyngen said.
U.S. government securities have lost 1.1 percent this year, the Bank of America Merrill Lynch U.S. Treasury Index shows. They returned 2.2 percent in 2012 and 9.8 percent in 2011.
Treasuries due in a decade or more are at almost the cheapest level since July 2011 relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on U.S. debt were 59 basis points higher than those in an index of other sovereign debt on June 13. The yields were 62 basis points higher on June 10, the most since July 28, 2011.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE Index ended the week at almost the highest level in a year. It was at 78.45 yesterday, after rising to 84.75 on June 6 and June 10, the most since June 2012. It averaged 62 over the past 12 months.
Hedge-fund managers and other large investors reversed their bets on 10-year note futures for a fifth straight week, taking a net-short position, according to U.S. Commodity Futures Trading Commission data.
Speculative short positions, or wagers that prices will fall, on the futures outnumbered long positions by 9,195 contracts on the Chicago Board of Trade for the week ended June 11. Last week, traders were net-long 19,684 contracts.
Demand fell this week at Treasury note and bond auctions amid speculation the Fed might cut back stimulus. The securities drew lower-than-average bids for a third consecutive month.
“There seems to be some trepidation stepping in, especially in front of the FOMC meeting,” Kevin Flanagan, chief fixed-income strategist in Purchase, New York, for Morgan Stanley Smith Barney, said on June 12. “They are looking for clarity from the committee.”
Demand has slackened this year at auctions of coupon-bearing Treasuries. Investors placed $2.96 of offers for each dollar of debt sold at the government’s $971 billion in auctions of Treasury notes and bonds, compared with a record bid-to-cover ratio of $3.15 in 2012, data compiled by Bloomberg show.
The Fed is buying $85 billion of Treasuries and mortgage securities a month to spur the economy, and has kept the target for overnight lending between banks at almost zero since December 2008. Treasury yields surged since May as investors bet the central bank would slow the purchases amid data that showed increases in U.S. payrolls and home sales, even as first-quarter gross domestic product expanded less than first estimated and consumer spending fell in April.
Ten-year yields dropped this week as traders said wagers the Fed would slow stimulus as soon as its next meeting were overblown.
“The market could have overreacted to tapering, and this brings us back to solid ground,” Justin Lederer, an interest-rate strategist at the primary dealer Cantor Fitzgerald LP in New York.
Bernanke, in testimony to the Joint Economic Committee on May 22, said the Fed “expects a highly accommodative stance of monetary policy to remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”
The Fed chief is scheduled to hold a press conference next week after policy makers’ meeting ends.
Traders lowered bets on inflation. The yield gap between 10-year Treasury Inflation Protected Securities and comparable nominal U.S. debt, which signals expectations for prices over the term of the debt, touched 2 percentage points on June 13, the least since January 2012.
Foreign holdings of Treasuries fell in April by the most since June 2006, according to the Treasury International Capital report released yesterday in Washington.
Total holdings of U.S. government securities fell by $69.6 billion, or 1.2 percent, to $5.67 trillion.
Foreign official holders, such as central banks and finance ministries, reduced their holdings by $28.5 billion, or 0.7 percent, to $4.06 trillion, while all other overseas investors reduced their positions in the debt by $41.1 billion to $1.61 trillion, the data show.
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