Treasuries Rise as Yields at 2-Month Highs Lure Buyers on Fed

Treasuries rose as 10-year note yields (USGG10YR) at almost the highest levels in eight weeks attracted buyers as Janet Yellen said the U.S. economy must improve before the Federal Reserve can begin slowing bond purchases.

Yields fell for the first time in three days as the Treasury’s auction of $24 billion of the securities attracted the higher demand since September. Yellen, nominated to be the next chairman of the Fed, commented in testimony prepared for her nomination hearing tomorrow before the Senate Banking Committee.

“It gives you an indication of where her stance is,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The Fed funds rate will stay lower for longer and will help out the front end of the curve.”

The 10-year yield dropped seven basis points, or 0.07 percentage point, to 2.70 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.5 percent note due in August 2023 rose 5/8, or $6.25 per $1,000 face amount, to 98 9/32. The yield climbed to 2.79 percent yesterday, the highest level since Sept. 18.

The central bank buys $85 billion of bonds each month in its quantitative easing program to put downward pressure on borrowing costs.

“A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases,” Yellen, the Fed’s current vice chairman, said the testimony. “I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

Trading Volume

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 14.6 percent to $303.35 billion, below the 2013 average of 314.6 billion. It fell to a 2013 low of $147.8 billion on Aug. 9. The high was $662.3 billion on May 22.

Volatility in Treasuries as measured by the Merrill Lynch MOVE Index was at 65.83, just below the 2013 average of 71.8.

The 10-year notes were auctioned today at a yield of 2.75 percent, compared with a forecast of 2.756 percent in a Bloomberg News survey of eight 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 2.7, compared with 2.58 in September.

Foreign Bidding

Indirect bidders, an investor class that includes foreign central banks, purchased 47.7 percent of the notes, compared with an average of 38.7 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 18.6 percent of the notes, compared with an average of 20.9 percent at the past 10 auctions.

“Great auction,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., a primary dealer. “Yields will go a little bit lower. Tens can go back to 2.65 percent. We’re two-thirds through the supply period and I don’t expect them to taper in December.”

The U.S. sold $30 billion of three-year debt yesterday at a yield of 0.64 percent and will auction $16 billion of 30-year bonds tomorrow.

Yield Curve

The yield difference between three- and 10-year notes narrowed three basis points to 2.12 percentage points after reaching 2.18 percentage points yesterday, the widest since August 2011. Historically, a steeper yield curve reflects investors anticipating faster economic growth.

A Labor Department report Nov. 8 showed U.S. employers added 204,000 jobs in October, exceeding the median estimate for a 120,000 gain in a Bloomberg survey.

Investors in Treasuries were net short for the third straight week ending yesterday, betting that the prices of the securities will drop, according to a survey by JPMorgan Chase & Co.

The proportion of net shorts rose to six percentage points from four percentage points the previous week, according to JPMorgan. The percent of outright shorts, or bets the securities will fall in value, rose to 25 percent from 23 percent the previous week, the survey said. The percent of outright longs was unchanged at 19 percent, the survey reported.

Investors’ neutral bets were 56 percent versus 58 percent, the survey reported.

March Tapering

The yield on the 10-year note should rise to 2.85 percent, up from a previous forecast of 2.6 percent, JPMorgan strategists led by Alex Roever wrote in a note to clients. The strategists changed expectations for a Fed first tapering announcement to the January policy meeting from the April meeting.

The benchmark yield will rise to 2.77 percent by year-end, according to the median forecast of economists in a Bloomberg News survey.

Fed officials will pare purchases of Treasury and mortgage-backed securities to $70 billion a month at their March 18-19 meeting, according to a Bloomberg survey on Nov. 8. The central bank purchased $1.39 billion of inflation-indexed Treasuries maturing between April 2029 and February 2043 today.

Policy makers have pledged interest rates will stay at almost zero while the outlook for inflation is no higher than 2.5 percent and unemployment remains above 6.5 percent. The jobless rate was at 7.3 percent last month, the Labor Department reported on Nov. 8.

“Markets beginning to resemble a casino,” Pacific Investment Management Co.’s Bill Gross, the manager of the world’s biggest bond fund, wrote in a message on Twitter. “If so, investors may be gambling. Some game better than others. Short-term bonds best.”

NI CLM

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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

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