Treasuries rose for the first time in four days on speculation a withdrawal of stimulus by the Federal Reserve may hurt weakening emerging economies, stoking demand for the safety of U.S. government debt.
Ten-year benchmark yields dropped from the highest level in more than two years after a technical indicator used by some traders suggested a reversal was imminent. Emerging-market stocks fell the most in six weeks as Indonesian shares extended a slump and currencies from Thailand to India weakened on concern capital outflows will accelerate.
“There’s been a lot of rumblings in the emerging space -- concerns for tapering and the impact there,” 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. “We have seen money go to work on the pullback.”
The U.S. 10-year yield fell seven basis points, or 0.07 percentage point, to 2.81 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.5 percent benchmark note due in August 2023 rose 18/32, or $5.63 per $1,000 face amount, to 97 9/32. The yield climbed to 2.90 percent yesterday, the highest level since July 2011.
Yields have jumped more than 20 basis points this month on speculation the U.S. economy is strong enough to prompt the central bank to slow stimulus as soon as its September meeting. The Fed publishes minutes of its July meeting tomorrow. Investors withdrew $8.4 billion from emerging-market exchange-traded funds this year amid a selloff.
Treasuries have lost investors 3.8 percent as of yesterday, according to Bloomberg U.S. Treasury Bond Index. The securities returned 2.2 percent in 2012.
“We’ve sold off so much of late that value buyers are coming in,” said Matthew Duch, a fund manager in Bethesda, Maryland, at Calvert Investments, which oversees more than $12 billion in assets. “The Fed minutes could be telling and give the market direction.”
The Fed’s first step may be to reduce debt purchases next month by $10 billion to a $75 billion pace, according to a Bloomberg survey concluded last week.
Fed policy makers led by Chairman Ben S. Bernanke are contemplating how to end a third round of quantitative easing that has swelled the Fed’s balance sheet to a record $3.65 trillion. The central bank will end purchases in mid-2014, according to the median estimate in a Bloomberg survey of 48 economists conducted Aug. 9-13. The Fed next meets Sept. 17-18.
The Fed purchased $942 million in securities maturing from November 2024 to February 2031.
An indicator of momentum used by some dealers signaled that Treasuries are oversold. The 14-day relative-strength index for the 10-year yield rose above the 70 threshold yesterday that indicates it has climbed too much. The last time it exceeded that level was July 5, which was followed by a two-week rally.
‘The only way you get lower yields is if the Fed comes out and delays taper for months, but the Fed isn’t going to do that,” said Jim Bianco, president of Bianco Research LLC in Chicago.
The 10-year rate will end the year at 2.71 percent, according to a Bloomberg survey of 66 analysts with the most recent forecasts given the heaviest weighting. The yield will rise to 3 percent in the second quarter of next year, a separate survey shows.
The Fed has kept its target for overnight lending between banks in a range of zero to 0.25 percent since December 2008. Investors see a 53 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 from futures show.
Policy makers repeated in a July statement that the current range will be appropriate for at least as long as the unemployment rate is above 6.5 percent and inflation between one and two years ahead is projected to be no more than a half percentage point above the bank’s 2 percent target.
The jobless rate was 7.4 percent as of July. The Fed’s preferred inflation gauge showed prices rising 1.3 percent in the 12 months through June.
“The reality is most are waiting for payroll confirmation that tapering will begin,” said Murphy of Societe Generale in New York. “Plus-200,000 should confirm that the Fed has plenty of room to begin paring back on their purchases.”
Volatility as measured by the Merrill Lynch Option Volatility Estimate MOVE Index (BUSY) increased to 99.48 yesterday, the most since July 9, before slipping today to 95.70. The average for 2013 is 68.15.
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