Treasuries Fall on Fed-Tapering Speculation Before GDP, Jobs

Treasuries fell, with 10-year note yields reaching almost the highest level in more than two weeks, before the Federal Reserve meets this week to discuss whether to taper its $85 billion a month debt-purchase program.

U.S. debt declined before reports forecast to show the U.S. economy grew in the second quarter and the unemployment rate dropped in July. Gross domestic product expanded at a 1 percent annualized rate last quarter, a report July 31 may show. The difference in yield between Treasuries maturing in two and 30 years reached the widest in almost two years.

“We are moving closer and closer to tapering, and with no new news, the risk right now is for higher rates, not lower, unless we get some different news,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “Fair value is closer to 2.75 percent, given the state of the economy and the Fed’s stance.”

The benchmark 10-year yield rose four basis points, or 0.04 percentage point, to 2.60 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due May 2023 declined 10/32, or $3.13 per $1,000 face amount, to 92 21/32. The yield reached 2.63 percent on July 25, the most since July 10.

Yield Difference

The difference between two- and 30-year debt yields widened to 336 basis points, the most on a closing basis since September 2011.

U.S government securities due in 10 years and more dropped 1.5 percent in July, according to the Bloomberg U.S. Treasury Bond Index (BUSY10), amid speculation the central bank is moving toward reducing debt purchases. Treasuries have lost investors 2.4 percent this year, the index shows.

Ten-year yields will climb to 2.63 percent by year-end, according to a Bloomberg survey with the most recent projections given the heaviest weightings.

“The yield rise we’ve seen has been driven by the Fed, their view on the economy and when and what will drive them to pull back accommodation,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “This week will be critical with the Fed decision and the employment and GDP reports, all of which may be market moving. The big question will be how is the economy recovering and what will it mean for the Fed.”

Corporate Sales

Some bond dealers sold Treasuries in order to reduce the risk that a rise in bond yields would hurt the value of debt they are preparing to sell. Firms often take a short position in U.S. government debt as when they underwrite corporate issuance in order to cancel out the interest-rate risk they take on during the selling process.

International Business Machines Corp., the largest computer-services provider, is planning to offer $2.15 billion of dollar-denominated bonds in a two-part sale as soon as today.

“There’s hedge activity related to corporate issuance,” said Christopher Sullivan, who oversees $2.2 billion as chief investment officer at United Nations Federal Credit Union in New York. “In the absence of much volume, hedging-related activity like that can have a larger influence on prices than it normally would.”

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, decreased to $194.5 billion today, the lowest since July 22 and below the average of $274 billion this month.

Debt Auctions

The Treasury is scheduled to announce its quarterly funding needs on July 31, and a survey of the 21 primary dealers shows government sales will be cut by $40 billion to $100 billion during the next year.

About two-thirds of those responding, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., see reductions this year, possibly as soon as next month. The U.S. issued $2.153 trillion in 2012.

The U.S. Treasury Department said today it will borrow about 6.3 percent less in the July-to-September period than it projected three months ago as a stronger economy and job growth help narrow the nation’s budget deficit.

Issuance of net marketable debt of $209 billion compared with $223 billion initially forecast on April 29, after a net paydown last quarter, the Treasury said today in Washington. Borrowing needs for the October-December quarter were estimated at $235 billion. In a statement accompanying today’s borrowing needs, Treasury

Fed Buys

The Fed, which has been buying $45 billion of Treasuries and $40 billion of mortgage bonds each month to put downward pressure on borrowing costs, will start trimming purchases in September, according to economists.

The central bank will meet on July 30-31 after keeping its target for overnight lending in a range of zero to 0.25 percent since December 2008. Policy makers said in a June 19 statement that leaving the federal funds rate in that range “will be appropriate at least as long” as unemployment remains above 6.5 percent and the forecast for inflation in one-to-two years doesn’t exceed 2.5 percent.

“Moves will be exacerbated as we get closer toward GDP and the unemployment number,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “It’s a slow, quiet, illiquid market.”

A report Aug. 2 may show the unemployment rate dropped to 7.5 percent, from 7.6 percent, and the U.S. added 185,000 jobs in July, compared with 195,000 the previous month.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.