Treasury Yields Climb to Eight-Week High Amid Fed Tapering Bets

Photographer: Daniel Acker/Bloomberg

Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago. Close

Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago.

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Photographer: Daniel Acker/Bloomberg

Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago.

Treasury 10-year (USGG10YR) yields reached the highest level in eight weeks, as signs America’s economy is gathering momentum underpinned the case for the Federal Reserve to reduce asset purchases.

The benchmark notes fell before the U.S. auctions $30 billion in three-year notes today. Treasuries maturing in longer than 10 years slid 11 percent this year, the worst performers among 144 sovereign indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Fed Bank of Atlanta President Dennis Lockhart said a move by the central bank to trim its $85 billion of monthly bond buying “could very well take place” next month.

“Tapering may not be as far in the future as initially thought,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “You had a couple of data points that were better than expected, including payroll numbers. There’s no reason the market will turn away from the auctions this week. The levels are starting to look more attractive.”

The U.S. 10-year yield climbed three basis points, or 0.03 percentage point, to 2.77 percent as of 11:37 a.m. in New York from the close on Nov. 8. The 2.5 percent note due in August 2023 fell 1/4, or $2.50 per $1,000 face amount, to 97 22/32. The yield reached 2.79 percent, the highest level since Sept. 18.

Yield Level

The 30-year yield rose two basis points to 3.86 percent after increasing to 3.88 percent, the highest since Sept. 11. The Treasury market was closed yesterday for Veterans’ Day.

The three-year notes scheduled for sale yielded 0.65 percent in pre-auction trading, compared with 0.71 percent at the previous sale on Oct. 8. Investors bid for 3.05 times the available debt last month, the lowest bid-to-cover ratio since an auction in June.

Treasuries lost the most in four months Nov. 8 after a report showed the economy added more jobs in October than forecast, boosting speculation the Fed may slow bond purchases as soon as its Dec. 17-18 meeting.

“The market is a bit oversold,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “The three-year note should go well, given the fact that the market has backed up since the nonfarm-payroll number.”

Measure Assessment

The 14-day relative strength index (BFCIUS) for the Treasury 10-year note yield was at 62.8, according to Bloomberg data. The index was at 48.5 on Nov. 7 before climbing to 61.3 the next day after a Labor Department report showed U.S. employers added 204,000 jobs in October, exceeding the median estimate for a 120,000 gain in a Bloomberg survey. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.

The government is scheduled to sell 10-year notes tomorrow and 30-year bonds on Nov. 14. The U.S. will also auction three-and six-month bills today.

The extra yield on 30-year bonds versus three-year notes was little changed at 325 basis points after expanding to 328 basis points, the widest since September 2011, as investors demanded a higher premium to hold longer-maturity debt due to risk that growth will spur inflation.

Citigroup’s Surprise Index, which shows whether data beat or fell short of economists’ forecasts, was at 18.9 yesterday after rising to 19.4 on Nov. 8, the highest since Oct. 22.

Economic Reading

“Reports suggested that, unlike in Europe, economic recovery in the U.S. is more solid,” said Peter Osler, head of interest-rates strategy at broker Marex Spectron Group Ltd. in London.

The Chicago Fed’s national index, which draws on 85 economic indicators was 0.14 for September. It was forecast to rise to 0.15, the highest level since February, according to the median estimate of analysts in a Bloomberg News survey. The August level was revised to 0.13 from 0.14.

The Bloomberg U.S. Financial Conditions Index reached a record before Janet Yellen faces a confirmation hearing Nov. 14 to lead the Fed. The gauge, which combines everything from money-market rates to yields on government and corporate bonds to equity volatility, rose to 1.82, set for the highest closing level in data going back to January 1994.

Fed officials will decide to pare purchases of Treasury and mortgage-backed securities to $70 billion a month at their March 18-19 meeting, according to the median of 32 economist estimates in a Bloomberg survey on Nov. 8. The central bank currently buys $85 billion of debt a month and today purchased $1.57 billion in Treasuries maturing between February 2036 and February 2043.

Lockhart Views

“Confidence” in the economy is “key” in any cutbacks in stimulus, Atlanta Fed’s Lockhart said in an interview with Bloomberg Radio. Lockhart will also speak on the economy in Alabama. Dallas Fed President Richard Fisher said in a speech in Melbourne that monetary accommodation “becomes riskier by the day.” His Minneapolis counterpart Narayana Kocherlakota is also due to speak today.

Traders saw an 82 percent chance, from 74 percent a month earlier, that policy makers will hold the U.S. benchmark rate between zero to 0.25 percent by December 2014, according to Fed funds futures data compiled by Bloomberg.

U.S. government debt is becoming increasingly perilous to options traders who are pushing up the cost to protect against sudden losses by the most in a year, even as Fed stimulus suppresses volatility. The cost to lock in fixed-interest rates that are a half-percentage point above 10-year yields is now about 17 percent higher than contracts tied to prevailing rates, according to data compiled by Deutsche Bank AG.

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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