U.S. 10-Year Yields Decline for a Second Day on Economic Outlook

Treasury 10-year note yields declined for a second day after economic reports showed an uneven recovery as Federal Reserve policy makers consider the pace of tapering monthly bond-buying.

The difference between the yields on two-year notes and 10-year debt narrowed to the least in seven weeks as Fed Bank of Richmond President Jeffrey Lacker said he expects economic growth of 2 percent this year, less than the 2.8 percent median estimate in a Bloomberg News survey of economists. Treasuries had a third weekly gain as reports showed housing starts declined in December, industrial production slowed last month and consumer confidence unexpectedly dropped in January.

“The market is now focused on mixed economic news,” said Gary Pollack, the New York-based head of fixed-income trading at Deutsche Bank AG’s private wealth management unit, which oversees $12 billion. “The Fed will continue to taper modestly.”

Ten-year yields dropped two basis points, or 0.02 percentage point, to 2.82 percent as of 4:59 p.m. New York time, Bloomberg Bond Trader data show. The price of the 2.75 percent note due in November 2023 traded at 99 13/32. The yield reached the lowest level since Dec. 11.

Hedge Funds

Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures to the least since October, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 50,790 contracts on Jan. 14, down 77,255 contracts, or 60 percent, from a week earlier.

Net long position in 30-year bond futures reached 58,910 contracts, the most since December 2007, CFTC data show.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $222.7 billion from $269.6 billion yesterday. The average this year is $286.6 billion.

The benchmark yield exceeded levels in 13 of 25 developed countries, according to data compiled by Bloomberg. Securities in the Bloomberg U.S. Treasury Bond Index (BUSY) yielded 1.61 percent on average. The figure was 1.46 percent for the Bloomberg Global Developed Sovereign ex-US Bond Index.

Yield Levels

Ten-year yields have fallen since reaching 3.05 percent on Jan. 2, a level unseen since July 2011. The Treasury Department sold benchmark notes last week at 3.009 percent, the highest auction yield since May 2011.

Demand for the debt narrowed the difference between two-and 10-year yields to 2.45 percentage points, touching the least since Nov. 27. The average during the past 12 months is 2.08 percentage points.

“We’re stuck in a little bit of a tight trading range,” said Dan Heckman, a senior fixed-income strategist in Kansas City, Missouri, at U.S. Bank Wealth Management, which oversees $113 billion. “We’re having a hard time getting above 3 percent and a hard time getting below 2.8 percent. We’re locked in this range until we get a resurgence of some growth later this spring.”

Housing starts fell 9.8 percent to a 999,000 annualized rate following November’s revised 1.11 million pace, which was the highest since November 2007, the Commerce Department reported in Washington. The median estimate of 83 economists surveyed by Bloomberg called for 985,000. Permits for future projects declined 3 percent to a 986,000 pace.

Economic Update

Output at factories, mines and utilities climbed 0.3 percent after a revised 1 percent increase in November, figures from the Federal Reserve showed in Washington. The gain matched the median forecast of economists in a Bloomberg survey.

The Thomson Reuters/University of Michigan preliminary January index of consumer sentiment fell to 80.4 from 82.5 in December. Economists in a Bloomberg survey called for a reading of 83.5, according to the median estimate.

“These numbers are saying that the recovery we thought was ready to explode is anemic, at best,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “The Fed is not going to do anything until they see the whites of the eyes of inflation. Higher rates may be put off into the distance.”

The Fed’s Lacker said the Federal Open Market Committee is likely to consider more reductions to the pace of debt purchases at upcoming meetings given the substantial improvement in the labor market.

Taper Talk

It “made sense to initiate the process of bringing the program to a close” in December, Lacker said in the text of speech in Richmond. He dissented against continuing the purchases known as quantitative easing when he was a voter on the Federal Open Market Committee in 2012.

Inflation should move back to 2 percent during the next year or two, although it isn’t a “certainty” and the “FOMC will want to watch this closely,” he said.

The central bank said in December it will cut its monthly debt purchases, which focus on mortgage securities and longer-term Treasuries, to $75 billion from $85 billion starting this month. The Fed purchased $2.8 billion of Treasuries maturing between February 2022 and November 2023 today.

The policy committee reaffirmed its view that the target for the federal funds rate that banks charge each other on overnight loans will stay at almost zero at least as long as the unemployment rate is more than 6.5 percent, especially if inflation stays below its 2 percent goal.

Ten-year yields will climb to 3.40 percent by year-end, based on a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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

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