Treasury 10-Year Yields Rise to Week High as Chicago Index Jumps

Treasury 10-year note yields touched the highest level in more than a week after business activity expanded at the fastest pace in more than two years, adding to speculation the Federal Reserve’s stimulus is working.

The benchmark securities trimmed their first back-to-back monthly advance since April. Yields rose yesterday as Fed policy makers said the economy showed signs of “underlying strength” even as they continue the $85 billion in monthly bond purchases, known as quantitative easing. They next meet Dec. 17-18. The MNI Chicago Report (CHPMINDX) business barometer jumped a day before the Institute for Supply Management releases its factory gauge, which rose to a two-year high last month.

“The little less-dovish Fed and the PMI resulted in a little higher rates,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Fed. “People had been looking to the 2.40s on 10s, and it’s just not there yet.”

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.55 percent at 5 p.m. New York time, Bloomberg Bond Trader prices showed, after touching 2.57 percent, the highest since Oct. 22. It earlier fell four basis points to 2.50 percent. The 2.5 percent note maturing in August 2023 dropped 1/8, or $1.25 per $1,000 face amount, to 99 17/32.

Ten-year note yields have fallen six basis points this month after sliding 17 basis points in September.

Dealer Holdings

Primary dealers reduced their holdings of Treasuries by the most in 14 months for the five-day period ended Oct. 23, according to Bloomberg data. The dealers cut their holdings by $37.7 billion, or 26 percent, to $108.3 billion, the biggest reduction since the period ended Aug. 1, 2012.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $403 billion, the highest level since Oct. 10. Volume reached a 2013 high of $662 billion on May 22 and a low of $147.8 billion on Aug. 9.

Volatility in Treasuries as measured by the MOVE index rose to 61.68. It touched 58.54 on Oct. 28, the lowest level since May. It climbed on Sept. 5 to 114.2, the highest level in two months. It touched a record low 49 on May 9.

The seven-day relative strength index for the Treasury 10-year note yield was at 48.4 today, from 43.4 yesterday, according to Bloomberg data. It closed at 31.3 on Oct. 29. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.

Benchmark Indexes

The rise in yields today may have been limited by month-end buying. Funds that manage portfolios against benchmark indexes, including the Barclays U.S. Aggregate Index, typically buy longer-maturity Treasuries near month-end to align the interest-rate sensitivity of their holdings with the indexes.

The Barclays index, which many funds use to measure their performance, will extend its duration, the measure of rate-sensitivity, by 0.08 year on Nov. 1, compared with 0.10 year in October.

Treasuries have gained 0.5 percent this month, cutting their decline this year to 1.9 percent, according to Bloomberg World Bond Indexes. They have jumped 1.7 percent since Sept. 17, the day before the Federal Open Market Committee unexpectedly refrained from reducing stimulus, saying it needed more evidence of lasting improvement in the economy.

Fed Chairman Ben S. Bernanke is pushing unprecedented accommodation into the final months of his tenure as he seeks to shield the four-year economic expansion from the impact of higher borrowing costs and the government shutdown. The closure resulted in the furlough of as many as 800,000 federal workers and delayed release of data the Fed says it needs to evaluate the economy.

March Taper

“Growth is going to be slow for the next six months so they will not have an opportunity to taper,” said Charles Comiskey, head of Treasury trading in New York at primary dealer Bank of Nova Scotia. (BNS) “It’s going to be more difficult for them to get out” of the program.

The Fed’s monthly purchases will remain divided between $40 billion a month of mortgage bonds and $45 billion in Treasury securities. The central bank purchased $927 million in securities maturing between November 2024 and May 2030 today as part of the program. A Bloomberg survey of analysts taken on Oct. 17-18 forecast a March taper.

Treasury yields climbed after the MNI Chicago Report business barometer rose to 65.9 in October from 55.7 a month earlier, the fastest pace since March 2011. Readings above 50 signal expansion. The median projection in a Bloomberg survey of economists was 55. The index averaged 54.6 in 2012 and 62.8 in 2011.

Notes Auctions

“The Chicago PMI was meaningfully better than expected,” said Dan Greenhaus, chief global strategist in New York at broker-dealer BTIG LLC. “We seem to be settling into the 2.5-to-2.55 percent level. As the year progresses, the bias may be a touch to the upside in yields.”

Jobless claims decreased by 10,000 to 340,000 in the week ended Oct. 26 from 350,000 the prior period, the Labor Department reported in Washington. The median forecast of 49 economists surveyed by Bloomberg called for a decrease to 338,000.

The Institute for Supply Management factory gauge was at 55 in October, according to the median estimate of economists surveyed by Bloomberg News, compared with 56.2 last month, which was the highest since April 2011. Readings greater than 50 signal growth.

The Treasury auctioned two-, five- and seven-year notes this week at the highest demand in six months as the Fed maintained its bond-buying program.

Investors bid $2.88 for every dollar of the $96 billion in debt sold, the highest since similar sales of the maturities in April, according to data compiled by Bloomberg. The bid-to-cover ratio was 2.85 for all sales of U.S. coupon securities in October, the highest since May.

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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