Treasury 10-year note yields (USGG10YR) rose to the highest levels in three weeks after a gauge of U.S. manufacturing expanded at a faster pace than forecast, weakening the case for the Federal Reserve to maintain stimulus.
The benchmark securities extended the first five-day drop in three weeks as Fed Bank of St. Louis President James Bullard said labor market gains in the past year could warrant a cut in the bond buying. Fed policy makers said Oct. 30 that the economy showed signs of “underlying strength” even as they maintained their $85 billion of monthly asset purchases.
“The Institute for Supply Management factory data was a little on the strong side, so it puts the tapering fear back into the market and we start to get higher yields,” said William Larkin, a fixed-income portfolio manager at Cabot Money Management in Salem, Massachusetts, in a telephone interview. “It’s become a Fed-centric environment.”
The 10-year yield rose seven basis points, or 0.07 percentage point, to 2.62 percent at 5 p.m. New York time, Bloomberg Bond Trader prices showed, after touching 2.63 percent, the highest since Oct. 17. The 2.5 percent note due August 2023 fell 1/2, or $5 per $1,000 face amount, to 98 31/32.
Yields have risen 11 basis points since Oct. 25 after dropping 18 basis points in the preceding two weeks.
“Stay at the front end of the yield curve,” Bill Gross, co-founder of Pacific Investment Management Co. and manager of the world’s biggest bond mutual fund, wrote today in a comment on Twitter. “Taper may come but policy rate hike is another matter.”
The Fed has kept the target rate at zero to 0.25 percent since December 2008. Policy makers said this week they will continue to divide their monthly purchases between $40 billion of mortgage bonds and $45 billion in Treasury securities as they await more evidence of a strengthening economy.
“Two key labor market indicators have shown clear improvement over the last year: Unemployment and nonfarm payroll employment,” Bullard said today in St. Louis. “This provides the most powerful part of the case for tapering.”
The unemployment rate has dropped to 7.2 percent from 7.8 percent in September 2012, while nonfarm payroll gains have averaged 185,420 a month after over the past year after an average of 130,000 in the preceding six months.
A Bloomberg survey of analysts taken on Oct. 17-18 forecast a tapering of the purchases in March, later than previous polls indicated as the government’s 16-day closure dented expectations for economic growth. The Federal Open Market Committee next meets Dec. 17-18.
“We’ve been in the April camp,” said Jacob Oubina, senior economist at RBC Capital Markets LLC in New York. “About 65 percent of the data has disappointed relative to consensus. We don’t think the Fed engages in tapering in 2013 and there’s not enough time to see a robust trend in the jobs data for them to consider tapering in January.”
The U.S. economy will probably expand at a 2 percent annualized rate in the final three months of the year, less than economists projected at the start of the budget impasse that resulted in a 16-day government shutdown.
The median projection of 71 economists surveyed by Bloomberg yesterday compares with a 2.4 percent forecast in an Oct. 4-9 survey. Gross domestic product, the sum of all goods and services produced in the nation, will accelerate to a 2.6 percent growth rate in the first three months of 2014, unchanged from the previous survey, economists said.
Treasuries gained 0.5 percent last month, cutting their decline this year to 1.9 percent, according to Bloomberg World Bond Indexes.
U.S. government debt extended declines today after the ISM factory index rose to 56.4 in October, the highest since April 2011, from 56.2 a month earlier, the Tempe, Arizona-based group’s report showed. Readings above 50 indicate growth. The median forecast in a Bloomberg survey of economists was 55.
Yields rose yesterday after the MNI Chicago Report (CHPMINDX) business barometer climbed to 65.9 in October from 55.7 a month earlier, the fastest pace since March 2011. Readings above 50 signal expansion.
“The correlation between the Chicago PMI and ISM is strong,” said Sean Murphy, a trader in New York at Societe Generale SA, one of 21 primary dealers that trade with the Fed. “We may see a better buying opportunity if the 10-year gets to 2.61-2.62 percent.”
A report from the Commerce Department on Nov. 4 will show that orders placed with U.S. factories increased 1.8 percent in September from a month earlier, according to a separate survey of economists. The August figure will also be released after being postponed last month because of a partial government shutdown.
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 25.8 percent to $108.3 billion, the biggest reduction since the period ended Aug. 1, 2012.
The average weekly volume for primary dealer trading of U.S. government debt in October dropped to $531.87 billion from $576.6 billion the previous month, according to Fed data. It touched a 2013 high of $668.3 billion in June and a low of $481 billion in August.
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