Treasuries Slide as Factory Gains Spur Fed Tapering Speculation

Treasuries fell the most in almost two weeks as a gauge of U.S. manufacturing rose more than forecast in August, reinforcing bets the Federal Reserve will soon announce plans to reduce monetary stimulus.

Yields on benchmark 10-year notes climbed eight basis points, extending the biggest annual rout in U.S. government securities in almost four decades. Treasuries fell earlier as demand for refuge eased while the threat of an immediate U.S. military strike against Syria declined. The Labor Department will report on Sept. 6 U.S. payrolls added more jobs in August than in July, and Fed policy makers meet Sept. 17-18.

“It’s been a one-way down trade with better economic news and the lessening of concern coming from Syria,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade directly with the Fed. “All eyes are looking toward that end-of-the-week data when the jobs market comes out.”

Benchmark 10-year yields increased eight basis points, or 0.08 percentage point, to 2.86 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. They jumped the most on an intraday basis since Aug. 1 and touched 2.91 percent, the highest since Aug. 23. The 2.5 percent note due in August 2023 lost 20/32, or $6.25 per $1,000 face amount, to 96 29/32.

Two-year (USGG2YR) note yields rose as much as three basis points to 0.43 percent, the highest level since July 2011. Thirty-year (USGG30YR) bond yields climbed nine basis points to 3.79 percent and touched 3.83 percent, the highest since Aug. 23.

Since 1978

Volatility rose to the highest level in almost two months. Volatility as measured by the Merrill Lynch Option Volatility Estimate MOVE Index rose to 105.78, the highest since July 8. The average for 2013 is 68.94.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 12 percent to $361 billion, the most since Aug. 22. 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 billion.

Bank of America Merrill Lynch’s U.S. Treasury Index is on course to drop 4.7 percent this year, which would be the biggest annual loss since the gauge began in 1978.

The Institute for Supply Management’s factory index climbed to 55.7, the highest in two years, from the prior month’s 55.4, the Tempe, Arizona-based group’s report showed today. Forecasts of 85 economists surveyed by Bloomberg ranged from 51 to 55.8 and averaged 53.8. A reading of 50 is the dividing line between expansion and contraction.

“People are coming around to the conclusion that the Fed will start cutting back on bond purchases,” said Charles Comiskey, head of Treasury trading at the primary dealer Bank of Nova Scotia (BNS) in New York. “The data is pretty good.”

The Labor Department will report Sept. 6 that payrolls growth accelerated to 180,000 last month from 162,000 in July, a separate survey projected.

Missile Test

Treasury notes briefly pared declines after Russia’s state-run RIA Novosti news agency reported the launch of two ballistic rockets had been detected in the eastern Mediterranean. Israel said later the projectiles, which reports said fell into the water, were a joint missile test with the U.S.

President Barack Obama, in a surprise announcement Aug. 31, said he would seek congressional authorization to strike at Syrian President Bashar Al-Assad’s chemical-weapons capability in retaliation for its alleged use last month against the country’s own people.

“The fact that nothing was done over the weekend and that any response faces the complications of congressional involvement of course puts that response off and makes its likelihood subject to politics,” David Ader and Ian Lyngen, strategists at CRT Capital Group LLC in Stamford, Connecticut, wrote in a client note.

Trimmed Losses

Treasuries trimmed losses as stocks pared advances after House Speaker John Boehner said he’ll support Obama’s call for action on Syria. The Standard & Poor’s 500 Index cut its gain to 0.5 percent, after increasing as much as 1.1 percent.

Boehner, R-Ohio, told reporters after meeting with the president that use of chemical weapons requires a response and that only the U.S. has the capability to “stop Assad and to warn others.” Even so, an alliance of Tea Party members and left-leaning Democrats was coalescing in the House against using force in Syria.

Yield Curve

The Fed will trim its quantitative-easing program of $85 billion in monthly bond purchases at its policy meeting this month, according to 65 percent of economists in a Bloomberg News survey in August. The Fed bought $4.79 billion of Treasuries today maturing from September 2017 to May 2018.

Ten-year securities yielded as much as 248 basis points more than those due in two years, the widest spread on the yield curve since Aug. 23. The 2013 low was 141 basis points on May 1. A steeper yield curve suggests investors are betting faster growth will lead to higher long-term borrowing rates.

The curve probably will not steepen further, according to Francesco Garzarelli, co-head of macro and markets research at Goldman Sachs Inc. in London.

“We rallied into QE events and then sold off,” Garzarelli said in a Bloomberg Television interview. “This time around we could be very apprehensive going into the announcement and probably rally as the Fed cements this notion of forward guidance and removes some of the uncertainty around the tapering event.”

The weighted average of economists’ and strategists’ forecasts compiled by Bloomberg is for the benchmark 10-year note yield to end 2013 at 2.78 percent and jump to 3.06 percent by the middle of 2014, a level not seen since July 2011. Fourth-quarter predictions ranged from 2.10 percent to 3.76 percent.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

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.