Treasury Yields Reach Two-Year High as Tapering Consensus Grows

Treasury 10-year-note yields reached the highest levels in two years on heightened speculation a strengthening U.S. economy will prompt the Federal Reserve to reduce its bond-buying program as soon as next month.

The biggest weekly increase in yields on the benchmark security in more than a month pushed the difference between two-year notes to the most since July 2011, suggesting investors are betting faster growth will lead to higher long-term borrowing rates. The Fed’s first step may be tapering monthly debt purchases in September by $10 billion to a $75 billion pace, according to the median estimate of economists in a survey concluded this week. The central bank will release minutes of its July 30-31 meeting on Aug. 21.

“It seems to be the consensus that tapering is coming in September,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the U.S. central bank. “Until then, it’s a lot of noise.”

U.S. 10-year note yields rose 0.25 basis points to 2.83 percent, according to Bloomberg Bond Trader data. The price of the 2.5 percent note maturing in August 2023 fell 2 4/32, or $21.25 per $1,000 face value, to 97 5/32.

The yield rose to 2.86 percent yesterday, the highest since Aug. 1, 2011. The increase this week is the most since the five days ended July 5. That widened the gap to two-year note yields to 249 basis points, the most since July 2011.

Economic Data

Treasuries have fallen 3.4 percent this year, according to Bloomberg World Bond Indexes. German securities dropped 2.3 percent and gilts are little changed.

Yields surged Aug. 15 after a Labor Department report showed 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. That followed a Commerce Department report two days earlier that said retail sales increased for a fourth consecutive month.

“The retail-sales number was good, and that accelerated the tapering talk,” said Dan Greenhaus, chief global strategist in New York at broker-dealer BTIG LLC.

Sixty-five percent of economists in a Bloomberg survey conducted Aug. 9-13 said the Fed will trim its $85 billion of monthly bond purchases at the next scheduled meeting Sept. 17-18. In a survey last month, half of respondents predicted a September reduction.

“Tapering was already 100 percent priced in,” said Richard Gilhooly, an interest-rate strategist at TD Securities Inc. in New York. “I don’t think the data this week changed anything.”

TIPS Auction

Investors see a 51.1 percent chance policy makers will raise the so-called federal funds rate to 0.5 percent or more by January 2015, data compiled by Bloomberg show.

The Fed has kept its target for overnight lending between banks in a range of zero to 0.25 percent since 2008.

The U.S. is scheduled to sell $16 billion in five-year Treasury Inflation Protected Securities on Aug. 22. The last sale of the securities in April was for $18 billion.

Fed policy makers have warned of the risks of prolonged inflation below their 2 percent target even amid unprecedented stimulus. 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, based on Labor Department data released Aug. 15.

Consumer prices increased 2 percent in the 12 months ended in July after a 1.8 percent year-over-year gain the prior month.

“The numbers are a little bit on the weak side, but not enough to change the mentality of the market right now,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “For right now the market has made up its mind in going to higher yields.”

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

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

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