Treasuries dropped, pushing 10-year note yields up for the third week this month, on speculation minutes of the Federal Reserve’s policy meeting indicated the bank may trim debt purchases by the end of the year.
The yield difference between five- and 10-year notes, known as the yield curve, widened to the most in two years Nov. 21 after a Labor Department report showed jobless claims fell more than forecast last week. Fed Bank of St. Louis President James Bullard said Nov. 20 a cutback in the bond-purchase program is “on the table” for policy makers’ December meeting. Treasury will sell $96 billion in notes next week.
“The market has accepted that tapering is going to be a reality,” said Ward McCarthy, chief financial economist in New York at Jefferies LLC, one of 21 primary dealers that trade with the Fed. “The Fed keeps telling us it’s a data-dependent decision and December is on the table. One of the consequences will be a steeper curve.”
The benchmark 10-year yield rose four basis points this week, or 0.04 percentage point, to 2.74 percent in New York, according to Bloomberg Bond Trader prices. The price of the 2.75 percent note maturing in November 2023 was 100 2/32.
Treasuries have lost investors 2.6 percent this year, including 0.7 percent this month as of Nov. 21, according to the Bloomberg U.S. Treasury Bond Index. (BUSY) They gained 2 percent last year.
The extra yield on 10-year notes versus five-year securities was 1.40 percentage points yesterday after expanding to 1.45 percentage points Nov. 21, the widest since August 2011.
The steeper yield 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.”
Hedge-fund managers and other large speculators increased net-long position in two-year note futures to the highest level since August, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 34,011 contracts in the week ending Nov. 19 on the Chicago Board of Trade, up 19 percent, from a week earlier.
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.
A sale of 10-year Treasury Inflation Protected Securities Nov. 21 showed not everyone is ready to abandon the notes. The $13 billion auction attracted the strongest demand since 2011 from a group of investors that includes pension funds and insurers.
Direct bidders, non-primary-dealer investors that place orders directly with the Treasury, bought 21.5 percent of the notes, the most since September 2011, according to data compiled by Bloomberg.
The difference between yields on 10-year notes and same-maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, was 2.20 percentage points, in line with the average over the past decade.
“Inflation is not really a concern,” said Brian Edmonds, the head of interest-rates trading in New York at primary dealer Cantor Fitzgerald LP. “Deflationary pressure is more of a concern.”
Fed officials said they might reduce $85 billion in monthly bond purchases “in coming months” as the economy improves, minutes of their October meeting showed on Nov. 20. The central bank has said it will keep short-term rates at almost zero at least as long as unemployment is above 6.5 percent and the forecast for inflation is below 2.5 percent. The jobless rate in October was 7.3 percent.
Yields accounting for inflation touched the highest level in more than two years this week as bond rates increased while consumer prices remain subdued.
Treasury 10-year notes yielded about 1.78 percent yesterday after subtracting the cost of living, data compiled by Bloomberg show. It narrowed from 1.84 percent on Nov. 21, the most since February 2011, when the yield rose to 2.84 percent.
U.S. consumer prices rose 1 percent in October from the year before, the Labor Department reported on Nov. 20. It was the smallest increase since October 2009 as retailers started discounting before the holiday shopping season.
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 Nov. 21 in Washington. The median forecast of 47 economists surveyed by Bloomberg called for a drop to 335,000.
The 10-year yield will rise to 2.90 percent by the end of March, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings.
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