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

Treasury 10-year yields rose to 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.

U.S. debt fell as 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. 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. The benchmark notes remained lower after the U.S. sold $30 billion in three-year debt, the first of three coupon auctions this week totaling $70 billion.

“These auctions remind us that buyers will emerge, it’s just a question of finding the right price,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of the primary dealers required to bid at the auctions. “It’s really all about the Fed.”

The U.S. 10-year yield climbed three basis points, or 0.03 percentage point, to 2.77 percent as of 5:01 p.m. in New York according to Bloomberg Bond Trader prices. 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, and is trading at almost its three-month average of 2.71 percent, according to Bloomberg data.

Note Sale

The 14-day relative strength index for the Treasury 10-year note yield was at 63, 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 yield on the current three-year note rose four basis points to 0.62 percent. Last month’s auction of three-year notes drew a yield of 0.71 percent.

The notes told today yielded 0.644 percent, compared with a forecast of 0.651 percent in a Bloomberg News survey of six of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 3.46, the highest since March and versus an average of 3.32 at the past 10 sales.

“The bid-to-cover recovery was a very good turn for Treasuries,” Kohli of BNP said.

Debt Demand

Investors bid $2.88 for each dollar of the $1.815 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.

Indirect bidders, an investor class that includes foreign central banks, purchased 33.3 percent of the notes sold today, compared with an average of 29.4 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 19.4 percent of the notes at the sale, compared with an average of 18.3 percent for the past 10 auctions.

“There’s no reason the market will turn away from the auctions this week,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “The levels are starting to look more attractive.”

Three-year notes have gained 0.2 percent this year, compared with a decline of 2.7 percent by Treasuries overall, according to Bank of America Merrill Lynch indexes. The three-year securities returned 0.6 percent in 2012, while Treasuries overall gained 2.2 percent.

Securities Sales

The government will sell $24 billion in 10-year debt tomorrow and $16 billion in 30-year securities on Nov. 14. The sales will raise $6.5 billion of new cash, as maturing securities held by the public total $63.5 billion, according to the U.S. Treasury.

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 purchased $1.57 billion in Treasuries maturing between February 2036 and February 2043 today.

Fed Speak

Minneapolis Fed president Narayana Kocherlakota, said in a speech in St. Paul, that he still supports keeping rates low at least until the unemployment rate falls below 5.5 percent and the one- to two-year outlook for inflation stays below 2.5 percent. The unemployment rate was at 7.3 percent last month, the Labor Department said last week.

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 reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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

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