Treasuries fell for a second day as economic reports added to signs the economy is improving, giving Federal Reserve policy makers scope to continue to taper bond purchases.
Benchmark 10-year yields pared gains after the central bank’s business survey found “moderate” growth across most of the country last month. U.S. debt fell earlier after a Fed gauge of manufacturing in the New York region rose this month to the highest in almost two years while producer prices in the U.S. climbed in December for the first time in three months.
“The better data is helping,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “I don’t see the market doing much until we see how the data plays out over the next few months. The range is 2.75 to 3 percent” for the 10-year yield, he said.
The benchmark 10-year note yield gained two basis points, or 0.02 percentage point, to 2.89 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.75 percent security due November 2023 fell 5/32, or $1.56 cents per $1,000 face amount, to 98 25/32. The yield rose as much as four basis points.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, climbed to $351 billion from $289 billion yesterday. The average this year is $293.7 billion.
Treasury market volatility as measured by Bank of America Merrill Lynch’s MOVE index was at 60.81. It touched an eight-week low of 58.92 on Jan. 13. The index has averaged 71.7 in the past year.
The three-year note has traded within a 23 basis point range during the past month on a closing basis, while the spread between the top and bottom yield for five-year notes has been 27 basis points. That compares with a 20 basis point difference between the high and low yield on benchmark 10-year notes during the period.
“It’s really more about pushing forward and pushing back any potential rate hikes,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “Threes and fives have really been the most volatile part of the curve. Today’s better-than-expected PPI number, as well as Empire Fed, has pushed those rate hikes slightly forward relative to where they were yesterday.”
Traders are pricing in a 26 percent probability that the central bank raises its benchmark rate by its January 2015 meeting, up from 22.9 percent on Jan. 10. The Fed has kept its target for overnight loans between banks in a range of zero to 0.25 percent for five years.
The U.S. added 74,000 jobs in December, a Labor Department report showed Jan. 10, compared with the median forecast for 197,000 positions in a Bloomberg News survey. The U.S. added 2.2 million jobs last year, the most since 2005.
Fed Bank of Chicago President Charles Evans, who has supported record stimulus, said the central bank’s slowdown in bond buying should be seen as a shift in emphasis toward keeping interest rates almost zero for a longer time.
“This decision does not, however, mean we thought the economy needed less overall policy accommodation,” Evans, who doesn’t vote on policy this year, said in Coralville, Iowa. “If in fact monetary policy and the recovery are now gaining better traction, it makes sense to rely more on our traditional short-term interest rate policy tool, the federal funds rate.”
The Fed decided last month to trim its monthly bond purchases to $75 billion from $85 billion, taking the first step toward unwinding its unprecedented stimulus. The Fed said it would keep rates extremely low “well past” when the jobless rate falls below 6.5 percent.
“The economic outlook is positive in most districts, with some reports citing expectations of ‘more of the same’ and some expecting a pickup in growth,” the Fed said today in its Beige Book business survey, based on reports gathered on or before Jan. 6.
The Fed Bank of New York’s general economic index rose to 12.51, topping the median forecast of 3.5 from 53 economists in a Bloomberg News survey. The reading was the highest since May 2012, when it registered at 15.85.
The producer price index climbed 0.4 percent, matching the median estimate of 79 economists surveyed by Bloomberg and following a 0.1 percent drop in November, a Labor Department report showed in Washington. The consumer price index rose 1.5 percent in the past year, according to the median forecast in a Bloomberg News survey of economists before the government report tomorrow.
The gap between 10-year yields for Treasuries indexed for inflation and non-indexed U.S. government debt rose to 2.27 percentage points from 2.25 percentage points yesterday, almost the 2.27-percentage-point average for the past 12 months. The spread reflects the average rate of inflation priced in by bond traders for the life of the securities.
To contact the editor responsible for this story: Dave Liedtka at email@example.com