Treasuries Fall First Year Since 2009 as Growth Spurs Fed Taper

Treasury 10-year (USGG10YR) note yields climbed the most in a year since 2009 as the U.S. economy improved enough for the Federal Reserve to reduce its bond purchases, leading investors to bet the stimulus will end this year.

U.S. government securities had their first annual loss in four years amid signs the recovery of the world’s biggest economy will be sustained amid reduced Fed bond-buying. Ten-year yields jumped 1.27 percentage points in 2013, reaching past 3 percent to a two-year high, and will touch 3.40 percent by the end of 2014, according to analysts surveyed by Bloomberg.

“Higher rates are in the cards; the question is how high and how soon,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “We’re going into a world were Treasuries are no longer going to be quite as manipulated or quite as controlled.”

The 10-year Treasury yield ended the year at 3.03 percent, the highest level since July 2011, up from 1.76 percent on Dec. 31, 2012. The yield rose six basis points yesterday, or 0.06 percentage point, according to Bloomberg Bond Trader prices. It climbed 162 basis points in 2009.

Thirty-year bond yields increased 102 basis points last year, also the most since 2009. They reached 3.97 percent yesterday, the highest since August 2011.

The Securities Industry and Financial Markets Association recommended trading in U.S. Treasuries be shut today for New Year’s Day after closing yesterday at 2 p.m. in New York.

GDP Growth

Economic data last month showed U.S. gross domestic product expanded at a 4.1 percent annualized rate in the third quarter, the strongest growth since the final three months of 2011 and up from a previous estimate of 3.6 percent. The unemployment rate dropped to 7 percent in November, a five-year low.

“Things are getting better,” Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pacific Investment Management Co., said yesterday in an interview with Tom Keene on Bloomberg’s Radio’s “Bloomberg Surveillance.”

Central banks’ influence is going to change as they “pivot” in their policy approach away from direct stimulus to guiding market expectations on interest rates, El-Erian said.

Treasuries lost 3.2 percent in 2013 through Dec. 30, set for the first annual decline since 2009’s record 3.7 percent drop, according to Bank of America Merrill Lynch’s U.S. Treasury index. They returned 2.2 percent in 2012. The decline was only the fourth since the firm began tracking the debt in 1978, with losses also tallied in 1994 and 1999.

Treasuries’ drop compared with a 0.3 percent decline in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index in 2013 through Dec. 30.

Global Indexes

U.S. government securities maturing in 10 years or more slumped 12 percent in 2013, the most among all of the 144 government bond indexes globally compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Treasuries traded yesterday at 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 0.63 percent, the least expensive on a closing basis since May 2011, according to a Columbia Management model. The current reading is above the average of 0.21 percent over the past decade and shows investors see bonds as close to fairly valued.

Yields climbed yesterday as the Conference Board said its index of consumer confidence in the U.S. rose to 78.1 in December from a revised 72 in the prior month. The median projection in a Bloomberg survey of economists called for a reading of 76.

Jobs, Supply

A report next week will show U.S. employers added 193,000 workers in December after expanding payrolls by 203,000 in November, economists in a Bloomberg survey forecast before the Jan. 10 data. The policy-setting Federal Open Market Committee will release minutes of its Dec. 17-18 meeting on Jan. 8.

The U.S. will auction three-, 10- and 30-year Treasuries on three consecutive days beginning Jan. 7. It will announce the size of the sales tomorrow. At offerings in December, the government sold $30 billion in three-year notes, $21 billion in 10-year debt and $13 billion in 30-year bonds.

“That supply is going to come at a very difficult time for the market to digest in front of nonfarm payrolls and FOMC minutes,” Donald Ellenberger, who oversees $10 billion of fixed income assets as head of multi-sector strategies at Federated Investors in Pittsburgh, said yesterday.

Fed Purchases

The Fed said Dec. 18 it will cut its monthly bond purchases to $75 billion in January, from $85 billion. According to the median forecast of 41 economists surveyed by Bloomberg on Dec. 19, the central bank will pare its buying by $10 billion in each of the next seven meetings before ending the program in December 2014 as the economy strengthens and joblessness decreases.

The estimates indicate the Fed will purchase $260 billion of Treasuries this year, a 52 percent decrease from 2013’s total, data compiled by Bloomberg show.

Policy makers also said on Dec. 18 “it likely will be appropriate to maintain the current target range for the federal funds rate well past” their 6.5 percent unemployment-rate threshold, especially if inflation stays below the Fed’s 2 percent target. The benchmark rate has been in a range of zero to 0.25 percent since December 2008.

Rate Bets

The odds of policy makers increasing the interest-rate target by January 2015, based on data compiled by Bloomberg from futures contracts, rose to 23 percent, from 11 percent at the end of November.

Usage of the Fed’s fixed-rate reverse repo facility surged before the end of the year as rates for borrowing and lending securities slid and banks shored up balance sheets.

The Fed Bank of New York drained $197.8 billion yesterday, the largest amount in a test of its fixed-rate reverse repo facility that began operation in September, through 102 bidders. It drained $102.6 billion from the banking system on Dec. 30 with 75 bidders.

The facility, which the central bank is testing as a tool for when it eventually reverses its unprecedented monetary accommodation, is a place for investors to put cash during the final week of the year.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; 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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