Treasury Yields at Almost 2 1/2-Year High as Bernanke Sees Gains

Treasury yields traded at almost the highest levels since 2011 as Federal Reserve Chairman Ben S. Bernanke said the headwinds that have held back the U.S. economy may be abating, leaving the country poised for faster growth.

Yields on 10-year notes traded in the narrowest range in three weeks as an indicator of traders’ outlook for inflation increased to the highest since September. The Fed will begin purchasing smaller amounts of Treasuries on Jan. 6 as it reduces its bond buying. It will keep weighing purchase reductions amid job gains, Richmond Fed President Jeffrey Lacker said.

“Everything comes down to Fed expectations versus reality,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “We should stay near the 3 percent level until we get a good handle on what the economic numbers will be for the first quarter. We need to see sustaining growth and continued economic momentum for higher rates to take hold.”

Related:

The benchmark 10-year note yield was little changed at 3 percent at 5 p.m. New York time. It reached 3.05 percent yesterday, the highest since July 2011, before ending the day at 2.99 percent. The price of the benchmark 2.75 percent security due in November 2023 slipped 1/32, or 31 cents per $1,000 face amount, to 97 29/32, according to Bloomberg Bond Trader data.

Ten-year yields traded within a 4.28 basis-point range today, or 0.0428 percentage point, the narrowest since Dec. 13. The yields were little changed on the week after rising for the previous six weeks, the longest stretch since June.

Long Bonds

Thirty-year (USGG30YR) bond yields were little changed at 3.93 percent after reaching 3.97 percent yesterday, the highest since August 2011. They declined one basis point, or 0.01 percentage point, on the week.

Bernanke, in a speech in Philadelphia four weeks before his term expires, cited payroll employment rising by 7.5 million since 2010 and the economy growing in 16 of the 17 quarters after the recession ended as evidence the Fed’s policies have succeeded.

“The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters,” Bernanke said. “Of course, if the experience of the past few years teaches us anything, it is that we should be cautious in our forecasts.”

Inflation Bets

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt called the break-even rate, widened to as much as 2.27 percentage points, the most since Sept. 23. The average over the past decade is 2.22 percentage points.

“The market basically believes the Fed is going to be on hold for a while, but then they are worried that in the more medium to longer term you’re going to have maybe a little bit more inflation and higher interest rates because growth and inflation will be better,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade with the U.S. central bank, said in a radio interview with Tom Keene on “Bloomberg Surveillance.”

The Fed said Dec. 18 it will cut its stimulus program of bond purchases, known as quantitative easing, to $75 billion a month from $85 billion, starting in January. It may take further “measured steps” depending on how the economy performs, officials said in a statement. It will buy $40 billion of Treasuries and $35 billion of mortgage bonds a month.

Fed Purchase

The central bank will make its first Treasuries purchase under the reduced program on Jan. 6, buying as much as $1.5 billion of securities due from February 2036 to November 2043.

Policy makers will pare purchases by $10 billion in each of its next meetings before ending the program late this year as the economy strengthens and unemployment decreases, according to the median forecast of analysts surveyed by Bloomberg Dec. 19.

“With the Fed on pace to continue tapering -- as long as the data remains strong -- we should continue to drift higher in rates,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “For the U.S., the main driver is still the Fed and how the market ultimately responds to bond purchases slowing down. The next few weeks should give some insight into how the market feels about tapering in action.”

Benchmark Rate

In their statement last month, Fed officials also said 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 central bank’s 2 percent target. The benchmark interest rate has been a range of zero to 0.25 percent since 2008.

The probability that the Fed will raise the interest-rate target by January 2015, based on data compiled by Bloomberg from futures contracts, increased to 26 percent, from 11 percent at the end of November.

U.S. companies increased employment by 200,000 jobs last month, versus 215,000 in November, ADP Research Institute in Roseland, New Jersey will say on Jan. 8, according to economists in a Bloomberg survey. The Labor Department will report two days later that U.S. nonfarm payrolls expanded by 195,000 workers in December, compared with 203,000 in November, another poll says.

The unemployment rate dropped to 7 percent in November, a five-year low, a level that will remain constant in December, according to economists surveyed by Bloomberg.

The Fed will continue to review reductions to bond purchases because improvements in the job market are meeting the central bank’s objectives, Lacker of the Richmond Fed said today at a Maryland Bankers Association forum in Baltimore.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.