U.S. 10-Year Yields Reach Two-Month High as Jobless Claims Fall

Treasury 10-year note yields reached the highest level in two months as a report showing U.S. jobless claims fell more than forecast last week added to speculation the Federal Reserve is moving closer to reducing bond purchases.

U.S. debt was little changed after slumping yesterday as minutes of the Fed’s October meeting showed officials may reduce their $85 billion a month of bond-buying if the U.S. economy improves as anticipated. The difference between the yields on two- and 10-year notes widened as much as 2.56 percentage points, the most since August 2011 as investors demand more to own longer-term securities before tapering begins. The Treasury sold $13 billion of 10-year inflation-protected securities at the highest yield since July 2011.

“There’s still some speculation they could move by the end of the year, but it’s more likely the Fed needs to see more strength in the data over a period of time to be comfortable tapering,” said David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors. “There’s a little bit of bargain-hunting with this backup in yields.”

The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 2.78 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.75 percent note due in November 2023 rose 1/8, or $1.25 per $1,000 face amount, to 99 22/32. The yield rose as much as four basis points and touched the highest level since Sept. 18.

Off Highs

The 10-year yields slipped from the day’s highs as the increase in yields attracted buyers.

“The market got a little bit oversold,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “Short-term, we’re oversold, long term we’re probably getting closer to fair value.”

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was at $419 billion, above the 2013 average of $315 billion. 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 68.35 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.

Yield Difference

The difference between the yields on three-year notes and the 30-year bond, known as the yield curve, was at 3.33 percentage points. It earlier reached 3.38 percentage points, a level not seen for more than two years. The yield spread jumped 12 basis points yesterday after central bank policy makers said they expect “ongoing improvement in labor market conditions.”

The steeper curve “reflects the potential for the Fed to taper,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “It seems the Fed is ready to taper in December if the data gives them reason to.”

Treasuries have lost 2.6 percent this year through yesterday, according to the Bloomberg World Bond Indexes. (BUSY)

U.S. Treasury Inflation Protected Securities, or TIPS, lost 8.4 percent this year through yesterday, underperforming Treasuries which fell 2.6 percent, according to Bank of America Merrill Lynch Indexes.

TIPS Sale

The 10-year TIPS yielded 0.56 percent at today’s auction, compared with an estimate of 0.59 percent, according to the average forecast of five of the Fed’s primary dealers in a Bloomberg News survey.

Direct bidders purchased 21.5 percent of the securities, the highest since September 2011. Indirect bidders, a group of investors that include foreign central banks, purchased 46.7 percent, the least since September 2012.

The U.S. previously sold 10-year TIPS on Sept. 19 at a yield of 0.5 percent. 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 U.S. is scheduled to sell $32 billion in two-year notes, $35 billion in five-year debt and $29 billion in seven-year securities on three consecutive days starting Nov. 25.

The five-year notes to be sold may be considered an additional issue of the outstanding seven year notes sold Nov.30, 2011 if the auction results in a high yield ranging from 1.375 percent to 1.499 percent, according to the Treasury.

Fed Buys

The Fed today bought $4.8 billion of debt maturing between November 2017 and July 2018.

Fed Bank of St. Louis President James Bullard said yesterday a cutback in the bond-purchase program is “on the table” for policy makers’ December meeting.

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 a Bloomberg Global Poll released before yesterday’s minutes.

Fed Chairman Ben S. Bernanke said this week that the benchmark interest rate will probably stay low long after the central bank’s asset purchases end.

Jobless claims in the week ended Nov. 16 dropped by 21,000 to 323,000, the fewest since the week ended Sept. 28, from a revised 344,000 the previous week, the Labor Department said in Washington. The median forecast of 47 economists surveyed by Bloomberg called for a drop to 335,000.

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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