Treasuries Head for Monthly Decline on Economy, Fed Taper Bets

Treasuries headed for the first monthly decline since August (BUSY) as reports of increased economic growth spurred speculation the Federal Reserve may vote to begin to reduce its bond purchases at a December policy meeting.

Yields on benchmark 10-year notes rose for the first time in five days as consumer sentiment improved, the Chicago Business Barometer was higher than forecast and initial claims for unemployment insurance declined last week to the lowest level in two months. Seven-year note yields climbed before the Treasury auctions $29 billion of the securities at 11:30 a.m.

“Any yield back-up is the direct result of the market looking at a 50-50 chance that the Fed tapers in December,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Fed.

Ten-year note yields rose three basis points, or 0.03 percentage point, to 2.74 percent as of 9:58 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.75 percent security maturing in November 2023 was 100 1/8. The yield has increases 18 basis points this month, the first since a 21-basis-point gain in August.

The Thomson Reuters/University of Michigan final index of consumer sentiment in November unexpectedly rose to 75.1 from 73.2 a month earlier. The median forecast of 65 economists surveyed by Bloomberg called for 73.1 after a preliminary reading of 72.

Employment Outlook

The MNI Chicago Report business barometer fell to 63 in November, compared with a median forecast for 60 in a Bloomberg News survey, from 65.9 a month earlier. Results above 50 signal expansion. The Conference Board index of leading economic indicators unexpectedly rose 0.2 percent, compared with a median forecast for no change in a Bloomberg News survey.

Recent data has showed signs of economic strength, as retail sales last month rose 0.4 percent versus forecast for a 0.1 percent gain, and as nonfarm payrolls expanded by 204,000 jobs in October, more than the 120,000 forecast in a Bloomberg News survey.

The strength of “the data is comforting,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, a primary dealer. “It has to be followed by a stronger employment report. If not, then tapering is off for December.”

Trading Hours

The Treasury market will be closed worldwide tomorrow for the Thanksgiving holiday, according to the Securities Industry and Financial Markets Association website. SIFMA recommended a 2 p.m. close in New York on Nov. 29.

The Fed will release its schedule for buying Treasuries in December at 3 p.m., according to the Fed Bank of New York website.

The seven-year auction follows a $35 billion five-year sale yesterday and a $32 billion two-year offering the day before.

The seven-year notes scheduled for sale today yielded 2.09 percent in pre-auction trading, compared with 1.87 percent at the previous sale on Oct. 31.

Investors bid for 2.61 times the amount of the five-year debt available, versus the average of 2.67 for the previous 10 sales before yesterday’s. Bidding for the two-year note amounted to 3.54 times the amount of debt offered, versus the average for the prior 10 auctions of 3.28 times.

Last month’s seven-year sale drew purchase orders for 2.66 times the debt available.

Bernanke’s View

Fed Chairman Ben S. Bernanke said last week the central bank will probably hold down its target interest rate long after ending $85 billion in monthly bond purchases. The Federal Open Market Committee meets Dec. 17-18.

“We see a slight increase in Treasury yields into year-end,” said Hendrik Lodde, a fixed-income strategist at DZ Bank AG in Frankfurt. “They probably won’t start to taper this year, March could be the date. It’s data-based so if the unemployment rate comes down fast maybe we’ll change our view.”

The BLOOMBERG RISKLESS RETURN RANKING shows U.S. debt returned a risk-adjusted 0.03 percent in the past two years, the least among the Group of Seven nations, even with below-average volatility. Italy and Japan led the group, with gains of 2.76 percent and 2.42 percent when adjusting for price swings.

Global Shifts

Central banks in Japan and the euro zone are stepping up monetary stimulus, while Fed officials weigh when to reduce debt purchases that have swelled the central bank’s balance sheet to a record $3.91 trillion. U.S. economic growth next year is forecast to be the fastest pace since 2006, at 2.6 percent, sapping demand for the perceived safety of Treasuries, while the euro-zone economies may advance 1 percent after two years of economic contraction.

“There is less global panic, and the U.S. economy is growing, and the Fed is preparing to taper policy at a time when the rest of the G-7 is still struggling and remain in full easing mode,” Raman Srivastava, the head of global fixed income at Boston-based Standish Mellon Asset Management Co., which manages $170 billion, said by phone. “G-7 debt is becoming less equal, and as central-bank policy and economic performances divide, the dispersion in performance between the U.S and the rest is going to continue.”

To contact the reporter on this story: 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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