Treasury Yields Drop From 2-Year High as Investors Weigh Outlook

Treasury 10-year yields fell from the highest level in more than two years as investors speculated whether the U.S. economy will improve enough for the Federal Reserve to end bond purchases in 2014.

U.S. government securities lost 3.4 percent in 2013, the first annual decline since a record 3.7 percent slide in 2009, Bank of America Merrill Lynch data showed. Yields dropped today as U.S. stocks slid and jobless claims declined before data next week forecast to show U.S. payrolls gains continued. Yields stayed lower as an Institute for Supply Management manufacturing index slipped. The U.S. Northeast braced for a winter storm.

“You’ll continue to see the 10-year yield grind higher, but it’s not going to be a one-way street,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist at Morgan Stanley Smith Barney. “When we cross the 3 percent threshold, that does bring some buyers in. The trend is higher, but it’s going to be more of a grind, not big leaps.”

Ten-year yields fell four basis points, or 0.04 percentage point, to 2.99 percent at 5 p.m. New York time after climbing earlier to 3.05 percent, the highest since July 2011. The price of the benchmark 2.75 percent security maturing in November 2023 increased 10/32, or $3.13 per $1,000 face amount, to 97 31/32.

Ten-year yields jumped 1.27 percentage points in 2013. They averaged 3.49 percent in the past decade.

Long Bonds

Thirty-year bond yields dropped five basis points to 3.92 percent after reaching 3.97 percent, the highest level since August 2011.

Yields declined as the Standard & Poor’s 500 (SPX) Index sank 0.9 percent after recording the best year since 1997.

“It’s a little bit of noise as the market gets under way in the new year,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The Treasury said it will sell $64 billion of notes and bonds next week in three daily auctions beginning Jan. 7. It will offer $30 billion of three-year debt, $21 billion of 10-year securities and $13 billion of 30-year bonds.

A gauge of Treasury volatility was at almost a three-week high. The Bank of America Merrill Lynch MOVE Index was at 73.40, after climbing Dec. 31 to 73.55, the highest since Dec. 5. It dropped to a six-month low of 58.31 on Nov. 18. The 2013 average was 71.35.

Volume remained below average as the New Year’s holiday week drew toward an end. Daily trading at ICAP Plc, the largest inter-dealer broker of U.S. government debt, totaled $209 billion, versus the 2013 average of $308 billion. Volume was $167 billion on Dec. 31, and slid to $73 billion on Dec. 26, the day after the Christmas holiday.

No Drama

“The only thing that could cause a paradigm shift in expectations for the economy would be a disastrous employment report next Friday,” said Lyngen of CRT Capital. “Between ISM, the fact that there’s no data tomorrow and the looming blizzard, any drama in the Treasury market will not occur this week.”

Jobless claims fell by 2,000 to 339,000 in the period ended Dec. 28, Labor Department data showed today in Washington. The median forecast of 26 economists surveyed by Bloomberg called for 344,000 claims.

U.S. employers added 193,000 workers in December, after increasing payrolls by 203,000 in November, economists in a Bloomberg survey forecast before the Labor Department releases the figures on Jan. 10. The unemployment rate held at a five-year low of 7 percent, according to the responses.

The ISM’s factory index declined to 57 in December from the prior month’s 57.3, which was the highest since April 2011, the Tempe, Arizona-based group reported today. Readings above 50 indicate expansion. Economists surveyed by Bloomberg forecast 56.8, with estimates ranging from 55.3 to 58. Manufacturing accounts for about 12 percent of the economy.

Yield Forecast

Ten-year Treasury yields will climb to 3.38 percent by the end of 2014, according to a Bloomberg survey of economists with the most recent projections given the heaviest weightings.

The yield difference between two- and 10-year notes reached 2.67 percentage points today, widest most since July 2011, before narrowing to 2.61 basis points.

U.S. government securities’ loss last year was only the fourth in Bank of America Merrill Lynch U.S. Treasury Index data going back to 1978. Treasuries also declined in 1994 and 1999.

Treasuries’ 2013 drop compared with a 0.4 percent decline in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index.

The Fed said after its Dec. 17-18 meeting that it will cut monthly bond purchases to $75 billion from $85 billion starting in January.

Fed Bets

The central bank will pare buying by $10 billion in each of its next meetings before ending the program late this year as the economy strengthens and joblessness decreases, according to the median forecast of economists surveyed by Bloomberg Dec. 19.

Policy makers also said last month “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 odds of the Fed raising the interest-rate target by January 2015, based on data compiled by Bloomberg from futures contracts, increased to 21 percent from 11 percent at the end of November.

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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