Treasury 10-Year Note Yields Reach Highest Level Since September

Treasury 10-year note yields touched the highest in more than three months after initial jobless-benefit claims fell more than forecast as the Federal Reserve prepares to cut back on its monthly bond-buying.

The extra yield investors can get by holding 10-year debt instead of two-year securities, the so-called yield curve, reached the highest level since July 2011. The Federal Open Market Committee said after its Dec. 17-18 policy meeting it will begin reducing $85 billion in asset purchases next month amid “growing underlying strength” in the economy, while maintaining the benchmark interest rate at virtually zero.

“The economy is gaining strength; rates will go higher,” said David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors. “We are in holiday mode right now, so markets are extremely thin.”

The yield on the benchmark 10-year note rose as much as two basis points, or 0.02 percentage point, to 2.998 percent, according to Bloomberg Bond Trader prices. That was the highest since Sept. 6, when the yield reached 3.005 percent, the most since July 2011. The yield was 2.991 percent at 5 p.m. New York time, up one basis point. The price of the 2.75 percent security due in November 2023 declined 3/32, or 94 cents per $1,000 face amount, to 97 30/32.

Thirty-year (USGG30YR) bond yields increased three basis points to 3.92 percent and touched 3.93 percent, the highest since Dec. 6. Two-year yields rose to 0.41 percent, the most since Sept. 16.

The gap between yields on U.S. two- and 10-year notes widened to as much as 2.59 percentage points, the most on an intraday basis since July 2011.

Volume Shrinks

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, slid to $72 billion, the lowest since Dec. 24, 2012, and less than a quarter of the 2013 average of $310 billion. Volume dropped this week as the Christmas holiday loomed. Trading closed early on Dec. 24 and stayed shut yesterday for the holiday. Volume at ICAP tumbled 51 percent to $155.9 billion on Dec. 23 and was $86 billion on Dec. 24, the day trading closed early.

U.S. government securities have lost 3.2 percent this year, according to the Bloomberg U.S. Treasury Bond Index. (BUSY) That compares with a 0.3 percent loss by the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index.

Treasury yields climbed above their global sovereign peers on Dec. 24 for the first time since June 2010, data compiled by Bank of America Merrill Lynch show. The spread narrowed to 0.01 percentage point from a low of minus 1.18 point in November 2011. The non-U.S. debt includes securities issued by other Group of Seven nations, Australia and South Korea among others.

German Debt

The yield difference between 10-year Treasuries and comparable German (USGG10YR) government debt increased to 108.5 basis points, the widest since 2006, as data shows the U.S. economy is accelerating at a faster pace than the euro region.

Treasuries traded at almost the cheapest level in more than two years, based on the term premium, a model that includes expectations for interest rates, growth and inflation. The gauge was at 0.61 percent, after reaching 0.63 percent on Sept. 5, the least expensive since May 2011, according to a Columbia Management model. The current reading is above the average of 0.21 over the last decade and shows investors see bonds as close to fairly valued.

Unemployment-benefit claims declined by 42,000 to 338,000 in the week ended Dec. 21, a Labor Department report showed today in Washington. Economists surveyed by Bloomberg called for a drop to 345,000.

Fed Bets

The Fed will reduce bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, according to the median forecast in a Bloomberg survey of 41 economists on Dec. 19. Policy makers next meet Jan. 28-29.

“They are going to do the first couple of tapers and then see what happens,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The data dependency will come probably starting at the April meeting. That’s when they will have enough time to gauge reaction to tapering.”

The odds of an increase in the central bank’s benchmark interest-rate target by January 2015 were about 22 percent today, based on data compiled by Bloomberg from futures contracts. The chances were 11 percent on Nov. 25.

Fed officials said in their statement last week it “likely will be appropriate to maintain the current target range for the federal funds rate well past” their 6.5 percent jobless-rate threshold, especially if inflation stays below the Fed’s 2 percent target. The benchmark rate has been a range of zero to 0.25 percent since 2008.

Inflation Gauge

Inflation as measured by the personal consumption expenditures price index rose 0.9 percent for the 12 months ended in November, and the jobless rate last month was 7 percent, a five-year low.

“They’ll try to keep rates anchored as much as they can, but it will be difficult if data continues to come in strong,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The risk is if the economy speeds up faster than people expect, the Fed won’t want to, and won’t be able to, keep rates where they are.”

Rates on Treasury one-month bills fell below zero amid rising demand for short-term debt at year-end. The rates dropped to negative 0.0051 percent, from 0.0051 percent Dec. 24.

Real Yields

Treasury 10-year notes pay 1.76 percent after subtracting consumer price increases as a stronger economy pushes yields higher. The gauge of real yields has averaged 1.09 percent since December 2008.

Today’s jobless-claims data followed reports on Dec. 24 that showed U.S. durable-goods orders rose in November more than forecast, and new-home sales exceeded projections.

The rise in Treasury yields has driven mortgage rates higher. Thirty-year fixed mortgage rates rose to 4.51 percent Dec. 24, compared with the 2013 average of 4.04 percent, according to Bankrate.com. It touched a low for the year of 3.4 percent in May.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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