U.S. 10-Year Yields Rise to Two-Month High on Fed Taper Outlook

Treasury 10-year yields rose to the highest level in two months as Federal Reserve officials said they might reduce $85 billion in monthly bond purchases “in coming months” as the economy improves, minutes of their last meeting show.

The difference between the yields on three-year notes and the 30-year bond widened to the most in more than two years as the policy makers expect “ongoing improvement in labor market conditions.” Fed Bank of St. Louis President James Bullard said earlier a cutback in the central bank’s purchase program is “on the table” for the December meeting, while 5 percent of investors surveyed are looking next month for a Fed decision to taper, according to the latest Bloomberg Global Poll.

“Their outlook is more robust than the general market’s,” said William Larkin, a fixed-income portfolio manager who helps oversee $500 million at Cabot Money Management Inc., in a telephone interview from Salem, Massachusetts. “It’s going to cause the expectation that tapering may come sooner than later.”

The benchmark 10-year yield gained nine basis points, or 0.09 percentage point, to 2.80 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.75 percent note due in November 2023 dropped 25/32, or $7.81 per $1,000 face amount, to 99 18/32. The yield reached the highest level since Sept. 18.

Trading Pace

Treasury trading volumes at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 79 percent to $481 billion, the most since June 24. Volume 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 rose to 66.45 after reaching 58.31 on Nov. 18, the lowest level since May. It touched a record low of 48.87 on May 9 and a 2013 high of 117.89 on July 5.

The extra yield on 30-year bonds compared with three-year notes, known as the yield curve, expanded to 3.34 percentage points, the widest since August 2011. The difference has averaged 2.83 percentage points in the past 12 months. The steeper curve suggests investors are demanding a higher premium to hold longer maturities amid signs growth will pick up and spur inflation.

“The fact that they didn’t overtly lower the unemployment threshold” helped to steepen the yield curve, said David Ader, U.S. government bond-strategy head at CRT Capital Group LLC in Stamford, Connecticut.

Jobless Threshold

The minutes show “a couple supported reducing the 6.5 percent unemployment rate threshold, while others said that change may cause concern about how committed the Fed is to the thresholds.”

Four of five investors expect the Fed to delay a decision to begin reducing its bond buying until March 2014 or later, with just 5 percent looking for a move next month, according to the latest Bloomberg Global Poll.

Those forecasting a cutback in March or later in the poll are split evenly between those who expect a move that month and those who see it afterward. Only one in 20 said the central bank will begin to reduce its purchases at its Dec. 17-18 meeting, according to the poll yesterday of investors, traders and analysts who are Bloomberg subscribers.

Fed Chairman Ben S. Bernanke said yesterday in a speech that interest rates will probably stay low until long after policy makers end debt purchases. Five Senate Republicans have said they’re inclined to support Janet Yellen to be chairman, which should give her the 60 votes she needs to be confirmed to succeed Bernanke.

Swaps Data

The U.S. 10-year interest-rate swap spread shrank to the narrowest in 10 months as investors sought to receive a fixed-interest rate on contracts backed by a bank over the relative safety of Treasuries. The spread touched 3.5 basis points, the least since January.

Treasuries have lost investors 2.3 percent this year, based on the Bloomberg World Bond Indexes.

Treasury yields dropped earlier after Bloomberg News reported the European Central Bank may reduce the rate for banks to park excess cash if more stimulus is needed to boost the region’s economy. ECB policy makers would reduce the rate for banks to park excess cash at the ECB to minus 0.1 percent from zero, said two people with knowledge of the debate.

“People tend to draw parallels when it comes to global monetary policy,” said Jacob Oubina, senior economist at Royal Bank of Canada’s RBC Capital Markets unit in New York. That “took yields lower. They are drawing an extension for what the ECB is saying, to the U.S.”

TIPS Sale

The Treasury is scheduled to sell $13 billion of 10-year Treasury inflation protected securities tomorrow. The U.S. previously sold the debt on Sept. 19 at a yield of 0.5 percent, the highest since July 2011. TIPs pay interest at lower rates than regular Treasuries on a principal amount that’s adjusted based on the Labor Department’s consumer price index.

The difference between yields on 10-year notes and similar-maturity TIPS, a gauge of expectations for consumer prices over the life of the debt, was at 2.17 percentage points, compared with the average of 2.31 percentage points during the past 12 months.

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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