Treasuries rose, pushing yields down from two-year highs, after a report showed purchases of new U.S. homes plunged in July, tempering speculation the Federal Reserve will slow its bond-buying program as soon as next month.
Benchmark 10-year yields had touched the highest level since July 2011 after Fed minutes released this week showed most officials are comfortable with a plan to start reducing bond purchases if the economy improves. Three Fed regional bank presidents differ over the timing for reducing the Fed’s $85 billion in monthly bond buying as the U.S. prepares to sell $98 billion of notes next week.
“We haven’t had a lot of weak news,” said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald, one of 21 primary dealers that trade with the Fed. “Post the big trade-off, I’m not surprised we’ll see some kind of a bounce.”
The U.S. 10-year yield fell seven basis points, or 0.07 percentage point, to 2.82 percent at 5 p.m. in New York, after touching 2.92 percent, according to Bloomberg Bond Trader prices. The benchmark 2.5 percent note due in August 2023 rose 19/32, or $5.94 per $1,000 face value, to 97 8/32.
The yield climbed to 2.93 percent yesterday, the highest since July 2011. It is still below its average of 3.54 percent in the past decade.
U.S. securities due in 10 years and longer tumbled 3.7 percent this month through yesterday, the biggest decline among G-7 nations, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 9.6 percent to $334.6 billion from $370 billion yesterday. The figure is down from a 2013 high of $662 billion reached on May 22 and up from a low of $148 billion on Aug. 9. The 2013 average is $313.5 billion.
Volatility as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was at 99.79, after touching 103 yesterday, the most since July 8. The average for 2013 is 68.9.
Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures in the week ending Aug. 20, after raising short bets the previous week to the most since July 2012, according to U.S. Commodity Futures Trading Commission data.
Speculative short positions, or bets prices will fall, outnumbered long positions by 24,840 contracts on the Chicago Board of Trade, down from 66,432 contracts in the week ending Aug. 13. Net-short positions fell by 41,592 contracts, or 63 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.
In 30-year bond futures, traders reversed from a net-short position to a net-long position, after holding a net short position since June. Long positions, or bets prices will rise, outnumbered short positions by 15,934 contracts.
Treasuries rose today after sales of newly built homes declined 13.4 percent to a 394,000 annualized pace, the weakest since October, following a 455,000 rate in the prior period that was lower than previously estimated, Commerce Department figures showed. The median estimate of economists surveyed by Bloomberg called for a decrease to 487,000. The drop was the biggest since May 2010.
“There was complacency in the market and the housing number was a catalyst that shook that complacency out at a time when a lot of long-term investors were already seeing value at the higher yield levels,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp.
Three Fed presidents differed over the Fed’s stimulus program, with one backing a tapering next month if the economy remains strong, and two others saying policy makers should take time to assess economic data.
“We can take our time” on slowing purchases, St. Louis Fed President James Bullard, who holds a vote on policy this year, said in a Bloomberg Radio interview from Jackson Hole, Wyoming. San Francisco’s John Williams told CNBC he wants to “taper our purchases later this year” if the economy doesn’t flag, while Atlanta’s Dennis Lockhart said he “would be supportive” of slowing purchases next month if the expansion holds up.
The Fed’s debate over when to taper $85 billion in monthly bond buying has roiled financial markets around the world and sparked a selloff in fixed-income assets. The central bank is buying $45 billion of Treasuries and $40 billion in mortgage bonds each month. U.S. policy makers next meet on Sept. 17-18.
Primary dealers, those companies that underwrite the U.S. debt, predict the Fed will reduce the pace of its asset purchases in September by $15 billion, to $70 billion a month, a July survey showed.
“The Fed has been the largest distorter of yield levels and you’ve had a few years of the market not wanting to fight the Fed,” said Guy Haselmann, an interest-rate strategist in New York at primary dealer Bank of Nova Scotia. (BNS)
The U.S. central bank has kept its target for overnight lending between banks at almost zero since December 2008.
Fed Vice Chairman Janet Yellen will moderate a discussion at a Fed conference in Jackson Hole, Wyoming, tomorrow. Ben S. Bernanke will be the first Fed chairman since 1988 to pass up attending the meeting.
The U.S. government is scheduled to sell $34 billion of two-year notes on Aug. 27, $35 billion of five-year securities the following day and $29 billion of seven-year debt on Aug. 29.
The U.S. is cutting the two-year auction by $1 billion, the first reduction after selling $35 billion of the securities each month since October 2010. The five- and seven-year auctions have been unchanged since 2010.
The Treasury said on July 31 it expects to gradually decrease coupon auction sizes during the coming quarter as the nation’s fiscal health improves. The federal budget deficit for July was $97.6 billion, bringing the total for fiscal 2013, which ends Sept. 30, to $607.4 billion. It was the lowest figure for that stage of a fiscal year since 2008.
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