Treasuries Fall on Taper Bets in First 2014 Back-to-Back Losses

Treasury 10-year notes fell for a second week in the first back-to-back losses this year amid bets the Federal Reserve will push on with bond-buying cuts, viewing the strength of the economy as being masked by harsh weather.

Yields on the benchmark securities reached a two-week high as Fed Chairman Janet Yellen said only a “notable change” in economic prospects would prompt a slowing in the pace of purchase reductions. Treasury volatility dropped to a nine-month low. U.S. factory production unexpectedly fell in January by the most since May 2009 as severe weather weighed on the economy. The Fed will release minutes of its January meeting next week.

“The bar for pausing the tapering process is really high,” said Jennifer Vail, head of fixed-income research at Minneapolis-based U.S. Bank Wealth Management, which oversees $112 billion. “We would have to see some material weakness in domestic growth for the Fed to take their foot off that gas pedal. They will continue on that path unless something substantial happens.”

The 10-year note yield increased six basis points, or 0.06 percentage point, to 2.74 percent this week in New York, according to Bloomberg Bond Trader data. It last rose for two weeks in December. The yield touched 2.78 percent on Feb. 13, the highest since Jan. 29.

The Bloomberg U.S. Treasury Bond Index (BUSY) has returned 1.6 percent this year after losing 3.4 percent in 2013. U.S. government securities gained 1.6 percent in the Bank of America Merrill Lynch U.S. Treasury Index in January, the best start to a year since 2008. Investors sought safety as the Fed began to slow the stimulus that fueled risk appetite worldwide.

Extra Yield

Treasuries remain attractive versus global counterparts. The extra yield U.S. 10-year notes offer over their Group of Seven nations peers was 49 basis points yesterday, the most since Jan. 22. The average for the past year is 18 basis points.

Rates on U.S. one-month bills matched the lowest level since July after Congress approved a suspension of the nation’s debt ceiling until March 2015, clearing the measure for President Barack Obama’s signature.

One-month rates fell as low as negative 0.0101 percent yesterday, matching the least in seven months. They climbed to 0.137 percent on Feb. 4 amid concern Congress would deadlock over a previous debt-limit suspension that expired Feb. 7.

A gauge of market volatility reached the lowest level since May. The Bank of America Merrill Lynch MOVE Index touched 58.09 on Feb. 13, falling from a four-week high of 67.26 it reached on Feb. 5. The average over the past year was 71.94.

‘Weak Data’

“Weak data drives us into the ground in terms of volatility,” Charles Comiskey, New York-based head of Treasury trading at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the Fed, said yesterday.

The U.S. is scheduled to auction $9 billion in 30-year Treasury Inflation Protected Securities on Feb. 20.

Demand at this week’s U.S. note and bond sales fell to a four-month low amid the outlook for further reductions in Feb bond-buying. Investors bid 2.86 times the $70 billion in three-, 10- and 30-year debt sold, the least since October.

The government auctioned $30 billion of three-year debt at a 0.715 percent yield, $24 billion of 10-year securities at a yield of 2.795 percent and $16 billion of 30-year bonds at a 3.690 percent yield.

Yellen pledged to the House Financial Services Committee on Feb. 11 to maintain the policies of her predecessor, Ben S. Bernanke, scaling back bond-buying under the quantitative-easing stimulus strategy in “measured steps.” It was her first report to Congress since being sworn in as Fed chief on Feb. 3.

‘Rate Hike’

“The market was hoping for a little more of a dovish assessment from Yellen,” Kevin Flanagan, a fixed-income strategist for Morgan Stanley Smith Barney in Purchase, New York, said on Feb. 11. “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.”

The central bank cut its monthly purchases of Treasuries and mortgage debt to $65 billion on Jan. 29 after its last meeting, citing economic improvement. Minutes of the meeting will be released Feb. 19.

That followed a $10 billion reduction at the December meeting, from $85 billion last year. The buying is designed to cap long-term borrowing costs and fuel growth.

The Fed has held its benchmark interest rate between zero and 0.25 percent since 2008 to support the economy.

‘Mother Nature’

Fed Bank of Dallas President Richard Fisher said yesterday policy makers should keep reducing bond-buying even as winter weather slows growth.

“I am not persuaded continuing to taper should be altered,” Fisher said in a Bloomberg Radio interview. “Even the Fed cannot offset Mother Nature. The economy has been moving in the right direction.”

U.S. factory production fell 0.8 percent in January, a report from the Fed showed. A Bloomberg survey forecast a 0.1 percent rise. Assembly lines slowed as colder weather tempered production, the Fed said.

Retail sales unexpectedly dropped last month, and initial claims for jobless benefits rose last week, other data showed.

“We’re seeing a little bit of a cooling off, a dampening of activity,” Adrian Miller, fixed-income strategies director at GMP Securities LLC in New York, said yesterday. “We now need to begin to see data that’s non-weather related that gives us an indication of where this economy is going.”

U.S. 10-year note yields after inflation rose to a three-week high. Called real yields, they reached 1.26 percent on Feb. 12, the most since Jan. 23, after subtracting consumer price increases, data compiled by Bloomberg showed. They traded at 1.24 percent yesterday.

Ten-year real yields touched a 2014 low of 1.07 percent on Feb. 3 and reached a 2014 peak of 1.49 percent on Jan. 3. The five-year average is 1.04 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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