Treasury 10-year notes fell as traders speculated whether the Federal Reserve will maintain its $85 billion in monthly bond buying after it ends a two-day policy meeting today.
Yields on 10- and 30-year securities surged to 14-month highs over the past month on bets the central bank would slow the pace of its asset buying. Long bonds fluctuated before the Fed issues a statement and Chairman Ben S. Bernanke holds a press conference. A government report yesterday showed that inflation stayed below the Fed’s 2 percent goal.
“The level of anxiety in the market is extremely high,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “Bernanke is very crafty in getting statements that don’t rattle the markets. We are going to see a statement that has very little in it, won’t indicate tapering and will reiterate that inflation is low and that the economy is still weak in some areas.”
Ten-year yields rose three basis points, or 0.03 percentage point, to 2.21 percent at 12:52 p.m. in New York, according to Bloomberg Bond Trader prices. They dropped two basis points earlier. The yields reached 2.29 percent, the highest since April 2012, on June 11. The 1.75 percent notes maturing in May 2023 fell 7/32, or $2.19 per $1,000 face value, to 95 29/32.
Thirty-year bond yields fell as much as three basis points and rose two basis points before trading little changed at 3.35 percent. They touched 3.43 percent on June 11, also the highest since April 2012.
Treasuries lost 1.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bunds fell 1 percent and U.K. gilts declined 1.8 percent.
Bernanke said on May 22 that the central bank could reduce the pace of its monthly bond purchases if there was sustainable improvement in employment. At the same time, he said a premature tightening of monetary policy might imperil the economic recovery.
The central bank will trim its purchases to $65 billion a month at the Oct. 29-30 FOMC meeting, according to a Bloomberg survey of economists.
The Fed is buying $45 billion in Treasuries and $40 billion in mortgage securities each month to put downward pressure on borrowing costs. It has kept the benchmark target rate for overnight loans between banks at zero to 0.25 percent since 2008 to support the economy.
Expectations for the date of the Fed’s first increase to its benchmark interest-rate target will influence the path of 10-year Treasury yields, said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee.
“What’s imbedded in the short market about Fed expectations drives 10-year yields,” Vogel said in a telephone interview.
“If money-market forward pricing moves the expected date one meeting from March to April 2015, the fair value on 10s falls to 2.025 percent,” Vogel wrote in a note to clients published today. “If it shrinks to December 2014, look for an increase to 2.35 percent.”
The Labor Department said yesterday consumer prices increased 1.4 percent in the 12 months ended in May, versus a 1.1 percent annual gain reported in April. The Fed’s inflation target is 2 percent.
Slow inflation gives the Fed room to maintain record economic stimulus as policy makers seek to lower the jobless rate from the current 7.6 percent.
Retail sales rose 0.6 percent in May, the most in three months, the Commerce Department reported on June 13. A Bloomberg survey forecast a gain of 0.4 percent.
“People are looking for instant gratification, putting things in place come next meeting or next month,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed. “Tapering is a natural progression of what we’re seeing in the data. It’s going to occur, but it’s not now.”
The spread between yields on 10-year Treasuries and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was at almost the lowest level in 17 months.
The 10-year break-even rate was at 2.12 percentage points after touching 2 percentage points on June 13, the least since January 2012. The average over the past 12 months is 2.38 percentage points. The U.S. is scheduled to sell $7 billion in 30-year TIPS tomorrow.
“The Fed will likely confirm that tapering of the quantitative-easing program lies ahead but be very vague about timing,” said Robin Marshall, a fixed-income director in London at Smith & Williamson Investment Management, which oversees the equivalent of $22 billion. “If inflation falls further, a reduction would be delayed.”
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, has increased to an average $396 billion a day since the start of May, from $281 billion in the first four months of the year.
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