Treasury notes slid for a second day, pushing 10-year yields to a three-month high, on bets the Fed will conclude its bond-buying program by the end of next year as it steadily reduces purchases amid economic improvement.
A government auction of $29 billion in seven-year notes drew the highest yield in more than two years as demand sank below average. Treasuries fell even after initial jobless-benefit claims unexpectedly rose last week. The Fed said yesterday it will cut monthly asset buying in its quantitative-easing program to $75 billion in January, from $85 billion.
“It’s the beginning of a trend,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “As the Fed begins to abate its QE program, the assumption is that the Treasury market will start to see higher yields.”
Treasury 10-year yields increased four basis points, or 0.04 percentage point, to 2.93 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. They reached 2.95 percent, the highest since Sept. 13. The price of the 2.75 percent security due in November 2023 fell 10/32, or $3.13 per $1,000 face amount, to 98 15/32.
Five-year note yields touched 1.68 percent, the highest level since Sept. 16, before trading at 1.64 percent, up 10 basis points. The yield on the two-year note increased three basis points to 0.36 percent, while the 30-year (USGG30YR) bond yield was little changed at 3.91 percent.
Trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, climbed 5.6 percent to $475 billion, the highest since Nov. 20. The 2013 average is $312 billion.
A gauge of Treasury volatility, the Bank of America Merrill Lynch MOVE index, rose for the first time in five days. It was at 67.74, compared with a 2013 average of 71.44.
“The front end is intact, but the question of when the Fed will raise rates is having some impact on the belly,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed.
The yield difference between two- and 10-year notes swelled to as much as 258 basis points, the widest since July 2011.
Fed Chairman Ben S. Bernanke said yesterday after the end of a two-day central-bank policy meeting that if job gains continue and inflation increases, “I imagine we’ll continue to do, probably at each meeting, a measured reduction” in buying.
The Fed acquired $6.9 billion of Treasuries under the purchase program today in two operations: $1.6 billion of securities due from 2039 to 2042 and $5.3 billion maturing from 2018 to 2019.
“The path of least resistance is still higher in yields,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Expectations are for the Fed to taper an additional $10 billion a meeting throughout 2014, and on that pace they should be done by year-end. We’re in the process of coming to grips with those expectations, and then the market will be back to being data-dependent.”
The central bank left unchanged yesterday its statement that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.
Policy makers said in the statement it “likely will be appropriate to maintain the current target range for the federal funds rate well past” the jobless-rate threshold, especially if inflation stays below the Fed’s 2 percent target. The rate has been a range of zero to 0.25 percent since 2008.
Inflation as measured by the personal consumption expenditures price index rose 0.7 percent for the 12 months ended in October, and the jobless rate last month was 7 percent.
Thirty-year bond yields increased no more than one basis point today. They’ll probably stay steady or move lower, said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York.
“Tapering was priced in; we had a ton of supply in the five- to seven-year part of the curve,” Mulholland said. “Bigger picture, inflation is low and likely to be so for the foreseeable future.”
The Treasury’s seven-year note auction, the final coupon-debt offering of the year, drew a yield of 2.385 percent, the highest since June 2011.
The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount of debt offered, was 2.45, versus a 2.57 average at the past 10 offerings of the security.
Indirect bidders, a class of investors that includes foreign central banks, purchased 41.7 percent of the notes, compared with an average of 40.3 percent at the past 10 auctions. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 17.1 percent, versus an average of 19.1 percent at the past 10.
The U.S. earlier auctioned $16 billion in five-year (USGG5YR) inflation-indexed notes to lower-than-average demand. The Treasury Inflation Protected Securities drew a yield of negative 0.375 percent, compared with a forecast of minus 0.363 percent in a Bloomberg survey of five primary dealers.
The bid-to-cover ratio was 2.5, compared with a 2.7 percent average at the past 10 offerings.
The offering was the 10th straight sale of five-year inflation-linked securities that drew a negative yield. Holders of TIPS receive an adjustment to the principal value of their securities equal to the change in the consumer price index, in addition to a fixed rate of interest that’s smaller than the interest paid to a holder of conventional debt. The fixed payment on five-year TIPS was pushed below zero as the rise in the CPI was greater than the yield on regular five-year U.S. notes, which fell with other Treasury yields amid haven demand.
Initial jobless claims reached an almost nine-month high, showing fluctuation in the filings that typically occurs around the year-end holidays. They climbed by 10,000 to 379,000 in the period ended Dec. 14, the most since the end of March, Labor Department data showed. Economists surveyed by Bloomberg called for a decrease to 336,000.
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