Treasury 10-year note yields rose past 2.5 percent for the first time in 22 months as investors fled U.S. debt with the Federal Reserve forecasting growth strong enough to allow policy makers to stop buying bonds.
Yields on the benchmark security for everything from mortgages to corporate loans surged this week by the most since the Iraqi war after Fed Chairman Ben S. Bernanke said June 19 the central bank may begin dialing down quantitative easing this year and end it in mid-2014. Yields on German bunds touched a 14-month high, while the dollar rallied.
“Bernanke has moved the range higher, and we still have liquidation going on,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed. “But the market is still in price-discovery mode. The range is undefined. There is value around these levels, but with an unwind like this there is still a lot of confusion on where we should be.”
Ten-year (USGG10YR) yields climbed 12 basis points, or 0.12 percentage point, to 2.53 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 2.55 percent, the highest since Aug. 8, 2011. The yields increased 40 basis points on the week, the most since March 2003.
The price of the 1.75 percent note due in May 2023 slid 31/32, or $9.69 per $1,000 face amount, to 93 6/32.
Thirty-year (USGG30YR) bond yields advanced seven basis points to 3.58 percent and touched 3.60 percent, the highest since September 2011. They rose 28 basis points on the week, the most since August 2009.
The 10-year note yield may extend its increase to 2.75 percent after closing above a technical level at 2.52 percent, according to Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. That’s the 61.8 percent Fibonacci retracement level from a July 1, 2011, high, he said. Fibonacci analysis is founded on the theory that prices tend to rise or fall by specific percentages after reaching a new highs or lows.
The level of “2.5 percent is psychologically significant, and 2.52 percent is technically significant,” Lyngen said. “If we are holding that level, it’s constructive for the market and we should consolidate in this new yield range of 2.3 percent to 2.5 percent. If we break the range, we could rise as high as 2.75 percent.”
The so-called term premium on Treasury 10-year notes rose to 0.27 percent, the highest since July 2011, according to a Columbia Management Investment Advisers LLC model. It turned positive this week for the first time since October 2011. The premium reached an all-time low of minus 0.64 percent last July.
“The market is adjusting to the new reality,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “People have been hiding in bond funds. Bond funds have been piggy-backing off the Fed. The adjustment process may take us a little further than you would think.”
Bernanke, speaking this week after a two-day meeting of the Federal Open Market Committee, said reducing bond purchases would depend on the economy achieving the central bank’s objectives. Policy makers are forecasting growth of as much as 2.6 percent this year and 3.5 percent in 2014.
The Fed has been buying $45 billion of U.S. government debt and $40 billion of mortgage securities each month to put downward pressure on borrowing costs in its third round of asset purchases. It purchased $1.5 billion today of Treasuries due from February 2036 to May 2042.
The central bank will cut its monthly bond purchases to $65 billion at its Sept. 17-18 policy meeting, according to 44 percent of 54 economists surveyed by Bloomberg after Bernanke’s June 19 press conference. In a June 4-5 survey, only 27 percent forecast tapering would start in September.
The central bank left unchanged its statement that it plans to hold its target interest rate at almost zero, where it’s been since 2008, as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent. Bernanke said a rate increase is still “far in the future.”
Fed-funds futures showed a 54 percent probability policy makers will raise the benchmark interest rate by at least a quarter-percentage point at their December 2014 meeting, versus a 14 percent chance at the start of May.
The gap between yields on 10-year notes and Treasury Inflation-Protected Securities of comparable maturity narrowed to 1.94 percentage points, the least since January 2012. The difference, known as the 10-year break-even rate, represents the bond market’s expectations for the rate of growth in consumer prices during the life of the debt.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index climbed to 103.73, the highest level since November 2011. The daily average this year is 62.
“People are re-evaluating what is going on here,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the Fed. “They’re going to start increasing short-term interest rates in the second half of 2014.”
Hedge-fund managers and other large speculators reversed their bets on 10-year note futures for a sixth straight week as of June 18, taking a net-long position, according to U.S. Commodity Futures Trading Commission data.
Speculative long positions, or wagers prices will rise, outnumbered short positions by 31,229 contracts on the Chicago Board of Trade. A week earlier, traders were net-short 9,195 contracts.
German 10-year bund yields climbed to 1.74 percent, the highest level since April 2012. Stocks fluctuated, with the Standard & Poor’s 500 Index losing as much as 0.7 percent and gaining 0.7 percent. The dollar rose against 12 of its 16 most-traded counterparts.
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