U.S. Yields Rise From One-Week Low on Taper Outlook

Treasury 10-year note yields rose from the lowest level in more than a week as minutes of the Federal Reserve’s last meeting signaled little likelihood of a pause in the central bank’s reduction of bond purchases.

U.S. government securities fell as the minutes said several policy makers favored cutting monthly bond-buying by $10 billion at each meeting. Ten-year yields dropped earlier as U.S. housing starts slowed more than forecast, adding to bets the economy may be stumbling even as harsh winter weather added to the homebuilding industry’s burdens.

“The Fed remains confident on where we are with the economy and will continue to move forward, which is pressuring rates to go higher,” said Sean Simko, a money manager who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “The expectation was for more of a dovish tone to the comments than what really came out.”

The 10-year yield increased three basis points, or 0.03 percentage point, to 2.74 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It dropped earlier to 2.67 percent, the lowest level since Feb. 11. The price of the 2.75 percent security due in February 2024 fell 9/32, or $2.81 per $1,000 face amount, to 100 3/32.

Volatility in U.S. government securities measured by the Bank of America Merrill Lynch MOVE Index increased for the first time in nine days, rising to 57.28 after dropping yesterday to 55.99, the lowest since May. The average this year is 64.4.

Volatility Increase

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 23 percent to $320 billion, the highest level since Feb. 11. The average this year is $327 billion. Volume dropped to $233 billion on Feb. 10 after reaching a seven-month high of $494 billion on Jan. 29.

Several Fed officials said that in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace” of the Fed’s bond-buying, the minutes of the Federal Open Market Committee’s Jan. 28-29 meeting said.

The central bank decided at the session to reduce purchases to $65 billion a month, from $75 billion, in the second straight $10 billion cut. Fed Chairman Janet Yellen pledged in Feb. 11 congressional testimony she would scale back stimulus in “measured steps” and said only a “notable change” in economic prospects would prompt a slowing in the pace. The Fed meets next on March 18-19.

Treasuries remain attractive versus their Group of Seven counterparts. The extra yield 10-year Treasuries offer over their G-7 peers was 53 basis points, the most since Jan. 8. The average for the past year is 19 basis points.

Interest Rates

Fed policy makers also plan to change their guidance soon for the path of interest rates as unemployment declines toward a threshold for considering an increase in borrowing costs, the minutes showed.

The FOMC said in December 2012 it would hold the target interest rate at virtually zero, where it’s been since 2008, at least as long as unemployment remained above 6.5 percent and forecasts for inflation stayed below 2.5 percent. The jobless rate dropped to 6.6 percent last month.

Officials disagreed on the timing of the first interest-rate increase. “A few” policy makers “raised the possibility that it might be appropriate to increase the federal funds rate relatively soon,” according to the minutes.

Atlanta Fed President Dennis Lockhart said today he’s “comfortable” with the regional Fed’s forecast for the first increase in the benchmark fed funds interest-rate target in the second half of 2015. He gave a speech in Macon, Georgia.

Housing Starts

Treasuries rose earlier as data showed housing starts fell 16 percent to an 888,000 annualized rate following December’s revised 1.05 million, the Commerce Department reported in Washington. The decrease was the biggest since February 2011. Economists surveyed by Bloomberg called for 950,000. Permits (NHSPATOT) for future projects declined 5.4 percent, a smaller drop than starts, a sign activity may stabilize as the weather improves.

“We know full well there has been a lot of weather impact; we just don’t know how much there is to it,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “At least until the end of March the data will be weaker because of it.”

The reports followed data over the past week showing retail sales and industrial production unexpectedly fell in January.

The producer price index rose 0.2 percent last month, following a 0.1 percent rise the prior month, a Labor Department report showed today in Washington. Economists in a Bloomberg survey called for a 0.1 percent increase. The data mark the debut of the PPI after its first major overhaul since 1978, which more than doubles its reach of the economy.

Taper Outlook

As long as the outlook “remains solid” and “does not deviate dramatically,” the Fed’s tapering of bond purchases should continue over the rest of year and end in the fourth quarter, said Lockhart of the Atlanta Fed.

The purchases were designed to cap long-term borrowing costs and fuel economic growth.

St. Louis Fed President James Bullard, speaking to reporters after a speech in Washington, said he hasn’t seen anything that “would shift my outlook lower” on the economy.

“My preference would be, as we go through the threshold on unemployment, to just drop reference to these explicit thresholds and just go back to a more normal policy where we say we’re looking at all the data.”

The Bloomberg U.S. Treasury Bond Index (BUSY) has risen 1.7 percent this year, after dropping 3.4 percent in 2013.

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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