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Treasuries Decline as U.S. Data Support Case for Fed Tapering

Treasuries fell, pushing 10-year yields toward the highest since 2011, as data showing gains in U.S. durable-goods orders, home prices and consumer confidence boosted the case for the Federal Reserve to slow bond purchases.

Government securities stayed lower after the U.S. sold $35 billion of two-year debt to below-average demand. Ten-year yields rose for a seventh day, the longest since March 2012. Fed Chairman Ben S. Bernanke said last week policy makers may reduce bond buying under their quantitative-easing stimulus strategy this year and end it in mid-2014 if economic growth is in line with their projections.

“You’re starting to see some data today that represents the view the Fed has in their forecasts,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “If you continue to see strong economic data like today, the assumption is that the Fed will be closer to tapering.”

The U.S. 10-year yield climbed seven basis points, or 0.07 percentage point, to 2.61 percent at 5 p.m. New York time after falling six basis points earlier to 2.48 percent. It touched 2.66 percent yesterday, the highest since August 2011. The price of the 1.75 percent security due in May 2023 slid 19/32, or $5.94 per $1,000 face amount, to 92 18/32.

Current two-year note yields increased two basis points to 0.41 percent. They reached 0.43 percent yesterday, the highest since July 2011. Thirty-year bond yields rose eight basis points to 3.62 percent.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, declined 12 percent to $478 billion. The 2013 average is $320 billion.

Relative Strength

A technical gauge signaled the increase in 10-year yields may have been too rapid. The 14-day relative-strength index, a monitor of momentum, rose to 79.8, exceeding the 70 level that indicates the yields may be poised to change direction.

Treasuries have lost 1.9 percent in June and dropped 2.9 percent this year, according to the Bloomberg U.S. Treasury Bond Index. They have declined 2.6 percent this quarter, a Bank of America Merrill Lynch index shows.

Bonds rose earlier as investors sought safer assets amid speculation a credit squeeze in China will slow growth. They reversed gains after China’s central bank said it will keep money-market rates at a “reasonable” level and reports in the U.S. showed gains in the world’s largest economy.

Bookings for U.S. goods meant to last at least three years increased 3.6 percent for a second month, the Commerce Department reported. The median forecast of economists in a Bloomberg survey was for a 3 percent increase. Excluding transportation equipment, where demand is volatile month to month, orders advanced 0.7 percent, also topping projections.

‘Coming Back’

“We’ve had a slow patch in manufacturing, and it looks like we could be coming back here as we enter the second half of the year,” said Jacob Oubina, a senior economist in New York at Royal Bank of Canada’s RBC Capital Markets, one of 21 primary dealers that trade with the Fed.

Confidence among U.S. consumers climbed in June to the highest level in more than five years. The Conference Board’s index rose to 81.4. Home prices rose more than forecast in the 12 months through April, with the S&P/Case-Shiller index of property values increased 12.1 percent from April 2012. New-home sales increased 2.1 percent in May, government data showed.

Break-Even

The yield gap between U.S. 10-year notes and comparable Treasury Inflation Protected Securities, a measure called the break-even rate that signals traders’ expectations for inflation over the life of the debt, widened for the first time in five days. It increased to 1.97 percentage points after touching 1.81 percentage points yesterday, the narrowest since October 2011.

Bernanke, speaking June 19 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.

Volatility in Treasuries as measured by Bank of America Merrill Lynch’s MOVE index climbed to 110.98 yesterday, the highest since November 2011, before slipping to 108.44 today. It has averaged 62 this year.

The Fed has been buying $45 billion of U.S. government debt and $40 billion of mortgage securities every month to put downward pressure on borrowing costs in its third round of asset purchases since 2008. It purchased $1.46 billion today of Treasuries due from February 2036 to November 2042.

‘Fair’ Auction

Today’s two-year note auction had a bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, of 3.05, almost matching the May sale’s 3.04, the least since February 2011. The average at the past 10 sales was 3.63.

The sale yielded 0.430 percent, the highest since May 2011. A Bloomberg News survey of seven of the Fed’s primary dealers forecast an auction yield of 0.423 percent.

“The market is moving to higher yields, and the short end is following along,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, which as a primary dealer is obligated to bid at U.S. government debt auctions. “The auction was fair. The stats were mixed. The questionable auctions will be tomorrow and Wednesday.”

The Treasury will sell $35 billion of five-year notes tomorrow and $29 billion of seven-year securities on June 27.

Indirect bidders, an investor class that includes foreign central banks, purchased 35.8 percent of the notes at today’s auction, the most since February 2012. That compared with an average of 23.8 percent at the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 7.8 percent of the notes, the least since April 2012, versus an average of 24.8 percent at the past 10 auctions.

Investors have bid $2.96 for each of the $1.01 trillion of notes and bonds sold by the Treasury this year, compared with a record high $3.15 for all of last year.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Jeff Marshall in New York at Jmarshall75@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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