Treasury Yields Rise to Highest Since 2011 on Fed Policy Outlook

Photographer: Scott Eells/Bloomberg

The New York Fed’s general economic index climbed to 10 in August, according to the median estimate of economists surveyed by Bloomberg News before today’s report. Close

The New York Fed’s general economic index climbed to 10 in August, according to the... Read More

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Photographer: Scott Eells/Bloomberg

The New York Fed’s general economic index climbed to 10 in August, according to the median estimate of economists surveyed by Bloomberg News before today’s report.

Treasuries fell, pushing yields on 10- and 30-year securities to the highest since August 2011, on speculation stronger U.S. growth will prompt the Federal Reserve to reduce its bond buying program as soon as next month.

Yields (USGG10YR) on 10-year notes, a benchmark for corporate and consumer borrowing rates, climbed above 2.8 percent for the first time in two years as reports showed U.S. initial jobless claims declined last week to the lowest level in almost six years and confidence among U.S. homebuilders rose in August to the highest level since 2005. Treasury data showed private investors abroad sold a record amount of notes and bonds in June, when Fed policy makers indicated they are considering a slowing of their quantitative-easing policy.

“Expectations are that the Fed will be withdrawing its stimulus and that’s definitely a negative for rates,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of 21 primary dealers that trade with the Fed. “Jobless claims were taken with the most weight. Clearly it’s a good sign for the labor market when you have an indicator of layoffs at its pre-recession level.”

Ten-year notes yields climbed five basis points, or 0.05 percentage point, to 2.77 percent at 5 p.m. New York time. The yield reached 2.82 percent, the most since Aug. 1, 2011. The benchmark 2.5 percent note due in August 2023 fell 14/32, or $4.38 per $1,000 face amount, to 97 21/32.

The rate on the 3.625 percent bond maturing in August 2043 climbed as high as 3.84 percent, the most since Aug. 8, 2011, when the bond market was rallying after Standard & Poor’s cut the U.S. credit rating from AAA for the first time.

Markets Slump

Sixty-five percent of economists in a Bloomberg survey conducted Aug. 9-13 said the Fed will trim its monthly bond purchases at the next scheduled meeting Sept. 17-18. In a survey last month, half of respondents predicted a September reduction.

Stocks tumbled and the dollar slumped as concern an easing of stimulus will reduce demand for assets denominated in the U.S. currency. The Standard & Poor’s 500 Index slipped 1.4 percent, the most since June. The dollar dropped 0.7 percent to $1.3347 per euro.

“There is a strong sense that the Fed wants to step back - - that the Fed no longer wants to increase the wedge between weak fundamentals and very high asset values,” Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “Combine the fact that people are starting to question this disconnect and the fact that the Fed put is no longer perceived as strong as it was before, then you get the across the board sell-off. You are not seeing a flight to quality.”

Employment Growth

The number of applications for unemployment insurance payments declined by 15,000 to 320,000 in the week ended Aug. 10, the fewest since October 2007, from a revised 335,000, a Labor Department report showed. The median forecast of 44 economists surveyed by Bloomberg called for 335,000. There was nothing unusual in the data and no states were estimated, a Labor Department spokesman said.

“Things are starting to change for the positive in the economy,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia (BNS), a primary dealer. “The question for the market is not whether they are going to taper, but by how much.”

Fed Forecasts

The U.S. added 162,000 jobs in July, while the unemployment rate fell to 7.4 percent, from 7.6 percent, the Labor Department reported Aug. 2. The Fed has been purchasing government debt since 2008 to strengthen the economy and has set a long-term unemployment forecast of 5.2 percent to 6 percent.

When Fed officials last released their economic forecasts in June, estimates for the jobless rate centered at 7.2 percent to 7.3 percent for this year, 6.5 percent to 6.8 percent for 2014, and 5.8 percent to 6.2 percent for the average of the final three months in 2015. The central bank has left the Fed funds rate at the zero to 0.25 percent level since December 2008.

The Federal Open Market Committee said on July 31 at the conclusion of a two-day meeting in Washington its fed funds target “will be appropriate at least as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half-percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

Market Re-pricing

The yield on the 10-year note has risen from a record low of 1.379 percent in July 2012. It touched a 2013 low of 1.6 percent on May 1 and has climbed amid improving economic data and speculation of Fed reducing its purchases.

“The market is continuing to re-price to the data and keeping a close eye on where the Fed will go,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, a primary dealer. “The data is following the script the Fed had laid out.”

The cost of living in the U.S. rose in July for a third month, supporting the Fed’s forecast that inflation will move closer to its target. The consumer-price index increased 0.2 percent after a 0.5 percent gain in June, Labor Department figures showed. The advance matched the median forecast of 82 economists surveyed by Bloomberg.

Foreign Selling

The National Association of Home Builders/Wells Fargo index of builder confidence climbed to 59 from a revised 56 in July, which was lower than previously reported, the Washington-based group reported today. The median forecast in a Bloomberg survey of economists called for the gauge to be 57. Readings above 50 mean more builders view conditions as good than poor.

Treasuries have fallen 3.1 percent this year, according to Bloomberg World Bond Indexes. German securities dropped 2 percent and gilts declined 4.3 percent.

Foreign selling of U.S. long-term portfolio assets rose for a second straight month in June as private investors abroad sold a record amount of Treasury notes and bonds, a government report showed.

The net long-term portfolio investment outflow for the month was $66.9 billion after a decline of $27 billion the prior month, the Treasury data showed. Net selling of long-term Treasuries by private foreign investors increased to $40.1 billion from $29 billion the prior month.

The U.S. announced today it will sell $16 billion in five-year inflation-indexed securities on Aug. 22. The last sale of the securities in April was for $18 billion.

The Fed today purchased $3.767 billion in securities maturing from August 2019 to July 2020. The Fed’s holdings of Treasuries on its balance sheet rose $11.4 billion in the period from Aug. 8-14, bringing the total to $1.998 trillion, the central bank said today.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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

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