Treasuries dropped for a second day amid bets that weaker-than-forecast economic data this week resulted from harsh winter weather and won’t keep the Federal Reserve from reducing bond purchases further.
Five-year notes led the decline even as a gauge of business in the Philadelphia region unexpectedly fell and weekly jobless-benefit claims were higher than forecast. Fed meeting minutes released yesterday signaled little chance of a pause in the central bank’s bond-buying cuts, and showed “a few” officials said “it might be appropriate to increase the federal funds rate relatively soon.” The U.S. sold $9 billion of inflation-indexed 30-year bonds to the weakest demand since 2001.
“The shorter end is suffering as we are seeing a continuation of the reaction from the minutes yesterday, and the fact that some members of the Fed were talking about raising the fed funds rate sooner than the market anticipates has caught some people off guard,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors.
The five-year yield increased two basis points, or 0.02 percentage point, to 1.54 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It reached 1.56 percent, the highest level in a week. The price of the 1.5 percent security maturing in January 2019 fell 3/32, or 94 cents per $1,000 face amount, to 99 26/32.
Ten-year (USGG10YR) note yields rose one basis point to 2.75 percent.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased for a third day, rising 13.8 percent to $366 billion, the highest level since Feb. 7. The average this year is $328 billion. Volume dropped to $233 billion on Feb. 10 after reaching a seven-month high of $494 billion on Jan. 29.
The U.S. said it will sell $109 billion in notes next week: $32 billion in two-year debt on Feb. 25; $13 billion in two-year floating-rate notes and $35 billion in five-year securities on Feb. 26; and $29 billion in seven-year debt the next day.
The auction of 30-year Treasury Inflation Protected Securities drew a yield of 1.495 percent, the highest since June 2011. That compared with an average forecast of 1.463 percent in a Bloomberg News poll of seven of the Fed’s 22 primary dealers and 1.330 percent at the last sale of the bonds in October.
The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.34, the lowest level since an auction in October 2001 that was the last offering before the U.S. suspended sales of the security for almost a decade. Auctions resumed in February 2010. The average ratio at the past 10 offerings was 2.70.
The difference between yields on 30-year bonds and similar-maturity TIPS, a gauge of the outlook for consumer prices over the life of the debt known as the break-even rate, narrowed to 2.25 percentage points, the least since Sept. 4. The average for the past decade is 2.47 percentage points.
Treasuries remain attractive versus their Group of Seven counterparts. The extra yield U.S. 10-year notes offer over their G-7 peers was 49 basis points. The average for the past year is 19 basis points.
“The most likely course of rates is to grind higher throughout the years, but not dramatically so,” said Matt Freund, chief investment officer of USAA Mutual Funds, who helps manage more than $60 billion in mutual fund assets. He spoke in a radio interview on “Bloomberg Surveillance” with Tom Keene and Michael McKee. “The slow grind higher will take longer than the markets expect.”
Fed Chair Janet Yellen pledged in Feb. 11 congressional testimony she would scale back bond-buying in “measured steps” and said only a “notable change” in economic prospects would prompt a slowing in the pace.
The central bank decided Jan. 29 at its last policy meeting to reduce monthly bond buying to $65 billion, from $75 billion, in the second straight $10 billion cut. It cited economic improvement. Minutes of the session released yesterday said several officials favored cutting purchases by $10 billion at each meeting.
The buying was designed to cap long-term borrowing costs and fuel economic growth. The Fed purchased $2.66 billion in Treasuries today maturing from February 2022 to November 2023.
The Fed has held the benchmark federal-funds rate target at zero to 0.25 percent since December 2008 to support the economy. Policy makers reiterated last month they expect “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”
Jobless claims declined to 336,000 in the week ended Feb. 15, a Labor Department report showed today in Washington. Economists surveyed by Bloomberg called for a drop to 335,000. The Philadelphia Fed’s business-outlook index fell to negative 6.3 percent this month, versus a Bloomberg poll’s projection for a reading of 8. The index was at 9.4 in January.
The data followed other reports this week that showed drops in housing starts and homebuilder confidence. A Fed index of manufacturing in the New York area fell more than forecast.
Snow and ice storms pummeled the eastern U.S. last week after a colder-than-normal January. The weather has played a role in depressing the economy as data on retail sales and employment were weaker than forecast.
“The market has gotten used to the story that the data isn’t really particularly useful right now and has grabbed onto what the Fed is saying that policy is unlikely to change because of the data,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, a primary dealer.
The consumer-price index rose 0.1 percent in January after a 0.2 percent gain the prior month, a Labor Department report showed today in Washington. Economists surveyed by Bloomberg called for a 0.1 percent rise.
The CPI climbed 1.6 percent from a year earlier, versus 1.5 percent in December. The Fed’s inflation target is 2 percent.
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