Treasury Futures Head for Second Monthly Loss on Stronger Growth

Treasury 10-year futures are set for their second monthly loss before a report forecast to show consumer confidence climbed, emphasizing the economy will be resilient to a trimming of Federal Reserve bond purchases.

U.S. government securities are headed for the first annual slide since 2009, led by a 12 percent loss on Treasuries due in 10 years or more. The 10-year yield will end next year at 3.40 percent, analysts forecast, after climbing 1.21 percentage points since Dec. 31 to 2.97 percent yesterday.

“The evidence of a recovery and a strengthening of the recovery in the U.S. is compelling,” said Adam Donaldson, the Melbourne-based head of debt research at Commonwealth Bank of Australia. “The Fed will continue to taper steadily and yields continue to rise in an environment where risk appetite remains strong.”

Ten-year futures contracts for March delivery were unchanged at 123 7/32 as of 11:44 a.m. in Singapore. Benchmark 10-year yields have climbed 23 basis points in December.

Financial markets are closed in Tokyo for a holiday. The Securities Industry and Financial Markets Association recommended U.S. Treasuries trading close today at 2 p.m. in New York and remain shut on Jan. 1 for New Year’s Day.

Treasury 10-year notes gained yesterday for the first time in five days amid month-end buying as yields near a two-year high drew buyers. The benchmark rose to 3.02 percent on Dec. 27, the highest since July 2011.

Month-End Buying

Fixed-income funds that manage portfolios against benchmark indexes, including the Barclays U.S. Aggregate Index, typically purchase longer-maturity Treasuries near month-end to align the interest rate sensitivity of their holdings with the indexes. The Barclays index will extend its duration, the measure of rate-sensitivity, by 0.07 year on Jan. 1, compared with 0.09 year on Dec. 1.

“You’re getting close to month-end so you’re having index extensions,” said Shyam Rajan, an interest-rate strategist at Bank of America Merrill Lynch in New York, one of the 21 primary dealers that trade with the Federal Reserve. “There was some concern that the Fed was saying financial conditions were too tight at 3 percent, but now it seems the Fed has come around to the idea that the economy can handle 3 percent rates so it should not be a problem to breach those levels if data remains strong.”

The Federal Open Market Committee said after its Dec. 17-18 gathering it will cut monthly buying of Treasuries by $5 billion to $40 billion, and those of mortgage-backed bonds by $5 billion to $35 billion starting in January.

Fed Guidance

The Fed will reduce its purchases in $10 billion increments during its next seven meetings before ending the program in December 2014, according to the median forecast of economists surveyed Dec. 19 by Bloomberg News.

Policy makers also said 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.

“The focus will be on Fed guidance rather than tapering and that will keep investors focused on the economic data,” said Damien McColough, an interest-rate strategist at Westpac Banking Corp. in Sydney. “The data isn’t going to give you an aggressive trend higher in yields for the first half of 2014.”

Economic Focus

A Conference Board report today will show U.S. consumer confidence increased to a reading of 76.2 this month, from 70.4 percent in November, economists in a Bloomberg survey forecast.

Data due Jan. 2 is predicted to show initial jobless claims rose while manufacturing growth slowed.

Applications for unemployment benefits rose to 342,000 in the week ended Dec. 28 from 338,000 in the previous period, a Labor Department report is estimated to show later this week. The Institute for Supply Management’s manufacturing index fell to 56.9 in December from 57.3 the prior month, according to a separate poll. Readings above 50 indicate growth.

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 5.1 for developed markets excluding the U.S., according to Bloomberg indexes.

The annual decline in Treasuries would be the first since they posted a record 3.7 percent drop in 2009. Treasuries due in 10 years or more have slumped the most among the 144 government bond indexes globally compiled by Bloomberg and the European Federation of Financial Analysts Societies.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net

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