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Treasuries Drop as Yellen Sees Further Cuts to Fed Bond-Buying

Treasury 10-year notes fell for the first time in three days as Federal Reserve Chairman Janet Yellen said reductions in the central bank’s bond purchases are likely to continue even amid uneven employment growth.

Yields on 10- and 30-year securities reached the highest this month as Yellen told U.S. lawmakers she’ll maintain her predecessor’s policies by scaling back stimulus in “measured steps” and signaled the bar is high for a change in that plan. House Speaker John Boehner said his chamber will vote tonight on a bill lifting the U.S. debt limit with no conditions. Stocks climbed. The U.S. auctioned $30 billion of three-year notes.

“People were looking for her to be a little bit more dovish,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed. “The risk-on tone hurt Treasuries a little bit. There are obviously some setups ahead of the supply.”

Related: U.S. Stocks Rise as Yellen Speech Fuels Economic Optimism

The 10-year yield climbed six basis points, or 0.06 percentage point, to 2.73 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. That’s the highest level since Jan. 29. The price of the 2.75 percent security maturing in November 2023 dropped 1/2, or $5 per $1,000 face amount, to 100 7/32.

Thirty-year (USGG30YR) bond yields rose four basis points to 3.69 percent and touched 3.71 percent, the highest since Jan. 29.

Volatility Falls

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index declined for a fourth day, reaching 61.49, the lowest level since Jan. 22.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 44 percent to $334 billion, the average this year. Volume reached $494 billion on Jan. 29, the highest in seven months.

Bill rates dropped after Boehner announced the House vote on a bill lifting the debt limit until March 2015. Senate Majority Leader Harry Reid, a Nevada Democrat, said his chamber will act on the measure “as quickly as we can” if the House passes it.

Rates on bills maturing Feb. 27, the day the Treasury Department said extraordinary measures to stay within the debt limit may run out, touched negative 0.035 percent before ending the day at zero. They climbed on Feb. 4 to 0.135 percent, matching the highest level since the securities were issued in August. Rates on bills due March 6 dropped to as low as 0.025 percent, after surging on Feb. 4 to 0.135 percent, the highest level since March.

Accord Expired

Bill rates jumped earlier this month amid concern there would be a showdown between Republicans and Democrats on extending the limit. An accord suspending the debt ceiling expired Feb. 7. President Barack Obama and congressional Democrats have said for months that action on the limit must not be combined with any other policy measures.

Current three-year note yields increased five basis points to 0.68 percent as the government conducted the first of three note and bond auctions this week.

The three-year notes the Treasury sold yielded 0.715 percent, compared with a forecast of 0.722 percent in a Bloomberg News survey of six primary dealers.

“It was a very strong auction,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, which as a primary dealer is obligated to bid in U.S. debt sales. “The stats were slightly better than average. We set up a fairly good concession coming into the event.”

The sale’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 3.42, the highest since December, versus 3.25 last month, the lowest since October. The average at the past 10 offerings was 3.27.

Bidder Participation

Indirect bidders, an investor class that includes foreign central banks, purchased 42 percent of the notes sold, the most since August 2011, versus an average of 32.7 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 16.6 percent, compared with an average of 16 percent at the past 10 offerings.

Primary dealers bought 41.3 percent of the notes, the lowest level since August 2011.

The Treasury is scheduled to auction $24 billion of 10-year notes tomorrow and $16 billion of 30-year bonds on Feb. 13.

Note and bond yields rose as Yellen, who was sworn in as Fed chief on Feb. 3, delivered her first semi-annual report on monetary policy and the nation’s economic outlook to the House Financial Services Committee. She testifies to the Senate Banking Committee on Feb. 13.

‘Strongly Support’

The former Fed vice chairman said she expects “a great deal of continuity” in the Fed’s approach to monetary policy. She said she served with her predecessor, Ben S. Bernanke, on the Federal Open Market Committee “as we formulated our current policy strategy and I strongly support that strategy.”

Only a “notable change in the outlook” for the economy would prompt policy makers to slow the pace of tapering, Yellen said in response to a question during the testimony. The Fed’s next meeting is March 18-19.

“The market was hoping for a little more of a dovish assessment from Yellen,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “Unless something changes in a meaningful way, they’re probably going to taper $10 billion a meeting and be done with it, and then the conversation moves to the first rate hike.”

Policy makers have held the benchmark interest rate at zero to 0.25 percent since 2008 to support the economy. The Fed reduced its monthly bond purchases to $65 billion from $85 billion during its last two meetings, citing signs the labor market is recovering. The debt-purchase program is designed to cap long-term borrowing costs and encourage growth.

U.S. Employment

U.S. nonfarm payrolls increased at a slower pace in December and January than economists forecast, according to Labor Department data. At the same time, the jobless rate dropped to 6.6 percent last month, the lowest since October 2008, the Feb. 7 report showed.

Stocks rose today amid speculation the U.S. economy will improve. The Standard & Poor’s 500 Index gained 1.1 percent.

Yellen said that, while growth has picked up, “the recovery in the labor market is far from complete.” She said she’s committed to achieving both parts of the Fed’s mandate: helping the economy return to full employment and returning inflation to 2 percent.

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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