Treasuries fell for the first time in five days after Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank should begin reducing its monthly bond buying in September.
Plosser’s comments snapped the longest consecutive streak of gains since February. Yields on 10-year notes dropped this week from the almost two-year high of 2.75 percent reached July 8 as Fed Chairman Ben S. Bernanke signaled that the asset purchases would continue for the foreseeable future to support the economy. The Treasury Department asked the 21 primary dealers that trade with the central bank to comment on demand for inflation-indexed securities.
“The Fed is just trying to pull away from this accommodation -- they don’t want rates to spike up, so they will keep interest rates lower for longer,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “Most central banks want to get out of the bond-buying business.”
The U.S. 10-year yield rose one basis point, or 0.01 percentage point, to 2.58 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It fell earlier as much as five basis points to 2.52 percent, the lowest since July 5. The 1.75 percent note due May 2023 fell 2/32, or 63 cents per $1,000 face value, to 92 26/32.
The yield fell 16 basis points this week, the most since the period ended June 1, 2012. It dropped for a fourth straight day yesterday, the longest stretch since Feb. 25.
Hedge-fund managers and other large speculators increased their net-short positions in 10-year note futures to the most since March in the week ending July 9, according to U.S. Commodity Futures Trading Commission data.
Speculative short positions, or bets prices will fall, outnumbered long positions by 47,110 contracts on the Chicago Board of Trade. Net-short positions rose by 24,193 contracts, or 106 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.
U.S. 10-year yields climbed 36 basis points in June when Bernanke said the Fed was prepared to slow asset purchases, known as quantitative easing, this year if the economy improved. Bernanke will deliver his semi-annual monetary policy report to the U.S. Congress next week.
“Rates were rising too fast, too quickly for their liking,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia (BNS), one of 21 primary dealers that trade directly with the Fed. Bernanke “walked it back by telling the market that even when QE goes away, they are still going to be accommodative.
While about half of the 19 participants in the Federal Open Market Committee wanted to halt the $85 billion in monthly bond purchases by year-end, many said in minutes of the June policy makers meeting released July 10 they wanted to see more signs that employment is improving before they’ll begin slowing the bond purchases.
The U.S. Treasury Department asked the 21 primary dealers that trade government debt directly with the Fed to discuss supply and demand dynamics in the market for Treasury Inflation-Protected Securities.
Dealers were also requested to comment on ‘‘specialness and fails’’ of the repurchase-agreement market in March and June in ‘‘on-the-run’’ 10-year Treasuries. The Treasury plans to meet with the firms July 25-26, before it releases guidance on the amount of bill, note and bond sales in the quarter.
The U.S. will sell $15 billion in 10-year inflation-indexed securities on July 18.
Investors bid an average of $2.89 for each $1 of the $66 billion in three-, 10- and 30-year securities auctioned over the past three days. The bid-to-cover ratio was 2.71 for $99 billion of two-, five- and seven-year notes sold in the three days ended June 27.
Fed purchases have increased the central bank’s balance sheet to a record $3.5 trillion from below $1 trillion five years ago.
Treasuries due in a decade or more are at almost the cheapest level in more than two years relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on U.S. debt were 81 basis points higher than those in an index of other sovereign debt yesterday. The yields were 86 basis points higher on July 10, the most since March 2011.
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was at 94.46, down from 117.89 on July 5, the highest since December 2010. The one-year average is 64.27.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 26 percent to $258.28 billion from $349 billion yesterday, the highest since July 5. The 2013 average is $321.5 billion.
France was cut by one step to AA+ from AAA, Fitch said today, joining Moody’s Investors Service and Standard & Poor’s in removing France from the shrinking club of top-rated governments. The outlook is stable.
Treasuries were higher earlier amid concern the European debt crisis may worsen as a political dispute in Portugal ensues. Portuguese 10-year bonds dropped for a third day as parliament debated the state of the nation. President Anibal Cavaco Silva said on July 9 that early elections were undesirable and urged the ruling coalition parties and the main opposition to reach a ‘‘national salvation” pact allowing Portugal to complete its aid program.
“There’s pressure on Portugal, which is significantly higher in yields,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York.
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