Treasury Yields Close to Week High Before Debt Sales, Fed Meets

Treasury 10-year note yields are close to a one-week high as the U.S. gets ready to sell $96 billion of two-, five- and seven-year securities over the next three days and Federal Reserve policy makers prepare to meet.

A measure of implied volatility on 10-year interest-rate swaps dropped to the least since May as investors waited to hear the Fed’s stance on its $85-billion-a-month debt-buying program. The Federal Open Market Committee’s two-day policy meeting starts tomorrow. The central bank won’t begin to slow the pace of bond purchases until March, according to a Bloomberg News survey of economists.

“The highlight is going to be what we get out of the FOMC,” said Sean Murphy, a trader in New York at Societe Generale SA, one of 21 primary dealers that trade with the Fed. “The market is looking for more guidance on the timing of tapering. There’s probably not enough data that gets them to taper this year. This 2.50 percent on the 10-year is the center point as we continue to be more data dependent.”

Benchmark 10-year note yields were little changed at 2.50 percent as of 11:07 a.m. New York time, according to Bloomberg Bond Trader prices after rising to 2.53 percent, the highest since Oct. 22. The price of the 2.5 percent note due August 2023 rose 2/32, or 63 cents per $1,000 face value, to 99 31/32.

The U.S. plans to sell $32 billion of two-year notes today, $35 billion of debt due in October 2018 tomorrow and $29 billion of seven-year notes on Oct. 30.

Debt Sale

The Treasury last sold two-year notes on Sept. 24 at a yield of 0.348 percent. Investors bid for 3.09 times the amount of debt available. The average over the past 12 of the monthly auctions is 3.43.

Swings on 10-year interest-rate swaps were at 75.22, a level not seen since May based on closing prices. The gauge is a measure of projected yield fluctuations over the next 90 days and has fallen from 116.91 in September when some investors speculated the Fed would begin trimming its bond purchases.

Bank of America Merrill Lynch’s MOVE Index, another measure of volatility in Treasuries, was as low as 61.14 last week, the least since May.

U.S. central bankers will pare the monthly pace of asset buying to $70 billion from $85 billion at their March 18-19 meeting, according to the median of responses in a Bloomberg News survey of economists.

Factory production in the U.S. rose less than forecast in September, indicating a pause in manufacturing leading into the budget battle that partially closed the federal government.

Output at factories rose 0.1 percent after a revised 0.5 percent gain in August that was smaller than initially estimated, figures from the Fed showed. The median forecast of economists in a Bloomberg survey called for a 0.3 percent September gain. Total industrial production, which also includes output by mines and utilities, advanced 0.6 percent as higher temperatures drove up electricity use.

Yield Forecasts

Ten-year note yields in the range of 2.474 percent to 2.399 percent are “poised to bottom and turn higher over the coming sessions,” according to MacNeil Curry, a technical strategist at Bank of America Merrill Lynch. A move to the mid-October high of about 2.759 percent is likely, New York-based Curry wrote in a report yesterday.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, averaged $260.8 billion last week. The average this year is $315.4 billion.

The Bloomberg U.S. Treasury Bond Index (BUSY) has declined 1.8 percent for the year through Oct. 25. Japanese bonds gained 2.5 percent, while Germany’s lost 1.4 percent.

“It makes sense to be rather short, and we expect yields to be slightly higher by the end of the year,” said Patrick Jacq, a senior rates strategist at BNP Paribas SA in Paris. “The economy is improving even if it is not yet materializing with strong job increases, and also even if the Fed remains accommodative, the prospect of tapering next year is still there and at some stage there will be a market reaction.” A short position is a bet an asset will decline.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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