Treasury 10-Year Notes Fall 3rd Day as Fed Sees Economic Growth

Treasury 10-year notes fell for a third day as the Federal Reserve said the economy maintained a “modest to moderate” pace of expansion, bolstering a case for policy makers to cut stimulus this month.

Yields on the benchmark securities climbed to almost two-year highs as consumers spent more on travel and tourism while manufacturing expanded “modestly” from early July through late August, the Fed said in its Beige Book business survey before policy makers meet Sept. 17-18. Data in two days is forecast to show employment growth quickened in August. The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, advanced to a more than two-year high.

“The data is fairly lukewarm -- it’s good enough to convince the Fed to not continue a period of extreme accommodation,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the Fed. “The market is fairly bearish for the near-term. If we get strong nonfarm payrolls, then it locks up tapering for September.”

Ten-year yields (USGG10YR) rose four basis points, or 0.04 percentage point, to 2.9 percent as of 5 p.m. New York time, based on Bloomberg Bond Trader data. The yield reached 2.93 percent on Aug. 22, the highest since July 29, 2011. The 2.5 percent note due in August 2023 fell 10/32, or $3.13 per $1,000 face amount, to 96 19/32.

The term premium rose to 0.55 percent, the highest level since July 2011. It was negative as recently as June 18.

Treasury Losses

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 9 percent to $331.4 billion after reaching $364 billion yesterday, 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 $313.4 billion.

U.S. government debt is on track to deliver a 3.6 percent loss this year, which would be the biggest annual decline since 2009, according to Bank of America Merrill Lynch indexes.

Accelerating U.S. growth has prompted Fed Chairman Ben S. Bernanke to pledge to slow monetary stimulus if the economic expansion meets policy makers’ forecasts. The U.S. central bank will reduce its monthly purchases of $85 billion at its meeting this month, according to 65 percent of economists in a Bloomberg survey last month.

Consumer spending rose in most districts, reflecting, in part, strong demand for automobiles and housing-related goods,” the Fed said of the report that is based on anecdotal reports from its 12 regional banks. “Residential real-estate activity increased moderately in most districts, and demand for nonresidential real estate gained overall.”

U.S. payrolls rose 180,000 in August, up from 162,000 in July, and the jobless rate held at 7.4 percent, according to economists surveyed before the data are released on Sept. 6.

Pimco’s Views

“Tapering nearly a sure thing,” Bill Gross, founder and co-chief investment officer at Pacific Investment Management Co., in Newport Beach, California, wrote in a note on Twitter. Gross estimates a $10 billion reduction in the Fed’s Treasury purchases with “front-end friendly guidance.”

Gross’s Total Return Fund, the world’s biggest bond mutual fund, shed $41 billion, or 14 percent of its assets in the past four months through losses and investor withdrawals. It had $7.7 billion in net redemptions in August, according to researcher Morningstar Inc. (MORN) Over the past four months, investors redeemed $26.4 billion. The fund lost 3.9 percent this year, trailing 86 percent of peers.

Pimco Total Return (PTTRX) had $251.1 billion in assets as of Aug. 30, according to data compiled by Bloomberg.

Yield Forecasts

Treasury 10-year yields will end the year at 2.78 percent and rise to 3.06 percent by mid-2014, according to the weighted average of analysts’ predictions compiled by Bloomberg.

“The market is preparing itself for tapering,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “People are waiting to see the Fed policy before they actually come back into the market and buy. Until the uncertainty is removed, it will be difficult for people to come back.”

Treasuries fell the most in almost two weeks yesterday as a gauge of U.S. manufacturing rose more than forecast in August.

The Institute for Supply Management’s factory index climbed to 55.7, a two-year high, from the prior month’s 55.4, the Tempe, Arizona-based group’s report showed yesterday. A reading of 50 is the dividing line between expansion and contraction.

The 14-day relative strength index for the Treasury 10-year yield rose to 64, from 61.6 yesterday, approaching the 70 level that some traders see as a sign a market measure has risen too fast and may be due to reverse course.

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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