Treasury Five-Year Note Yields Climb Most Since April on Yellen

Treasury five-year notes tumbled, pushing yields (USGG5YR) up the most in four months, as comments from Federal Reserve Chair Janet Yellen and minutes from the last policy meeting reinforced bets the central bank will begin raising interest rates next year.

The yield curve, the difference between U.S. five- and 30-year securities, flattened this week to the lowest since 2009 after Yellen said at a conference in Jackson Hole, Wyoming, that if progress in labor markets “continues to be more rapid than anticipated,” rates may go up sooner than traders estimate. Thirty-year bond yields fell yesterday amid signs turmoil in Ukraine is worsening. The U.S. will sell $106 billion in fixed-and floating-rate notes next week.

“There were some in the market who were looking for her to be slightly more dovish,” said John Bellows, a money manager who helps oversee $75 billion at Western Asset Management Co. in Pasadena, California. “Those people were disappointed. There’s more value in the 30-year. The 30-year gives investors better protection against unforeseen events.”

Yields on five-year notes climbed 12 basis points, or 0.12 percentage point, to 1.66 percent this week in New York, according to Bloomberg Bond Trader prices. It was the biggest jump since April 18. The price of the 1.625 percent security maturing in July 2019 dropped 19/32, or $5.94 per $1,000 face amount, to 99 27/32.

Benchmark 10-year note yields rose six basis points to 2.40 percent, and 30-year bond yields added two basis points to 3.16 percent.

Yield Curve

Treasuries returned 4 percent this year through Aug. 21, according to Bloomberg U.S. Treasury Bond Index. (BUSY) The securities lost 3.4 percent last year.

The yield curve flattened to 150 basis points, the lowest on a closing basis since January 2009, as traders priced in short-term interest rates moving higher.

Investors “are moving out the curve,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of the 22 primary dealers that trade with the Fed. “That’s consistent with the uncertainty around the Fed and what they are going to do. For that reason, the Treasury curve is flattening.”

Yellen told central bankers and economists yesterday at the Fed Bank of Kansas City’s annual symposium in Jackson Hole that determining when the job market has recovered fully is difficult, given the “depth of the damage” from the recession.

Rate Bets

“The economy has made considerable progress in recovering from the largest and most sustained loss of employment” since the Great Depression, Yellen said in the speech. At the same time, she underscored the Federal Open Market Committee statement last month that “underutilization of labor resources still remains significant.”

Traders saw a 53 percent chance the Fed will boost its benchmark rate from the current range of zero to 0.25 percent by July 2015, according to futures data compiled by Bloomberg. That compared with a 48 percent probability seen on Aug. 19. The central bank has held the rate unchanged since 2008 to support the economy.

Treasuries fell Aug. 20 after minutes of the FOMC meeting fueled speculation policy makers might raise interest rates sooner than they had anticipated.

Economic data this month showed the U.S. economy added more than 200,000 jobs for a sixth month in July, manufacturing expanded at the fastest pace in more than three years and housing starts increased more than economists predicted.

Other reports showed retail sales stalled in July in the worst performance in six months, and the consumer price index increased 0.1 percent last month from June, the slowest pace in five months.

‘Patient’ Fed

Sean Simko, who oversees $8 billion at SEI Investments Co. In Oaks, Pennsylvania, said he’s holding a bigger percentage of the five-year part of the yield curve than is contained in the indexes used to monitor performance. The central bank “is going to be patient” in raising rates, he said.

“The last thing the Fed wants to do is put themselves in a box,” Simko said. “It’s very data-dependent, which is what it should be.”

The Treasury Department will sell $29 billion in two-year securities, $35 billion in five-year debt and $29 billion in seven-year securities on three consecutive days starting Aug. 26. The amounts are unchanged from the July auctions of the maturities. The department will also sell $13 billion in two-year floating-rate notes at an Aug. 27 auction.

Relative Value

Treasuries were supported yesterday as Mario Draghi said in a speech in Jackson Hole that the European Central Bank is ready to add more stimulus as pressure mounts on the euro region’s policy makers for radical measures such as bond purchases to spur a slumping economy.

The outlook burnished Treasuries’ appeal relative to European sovereign bonds. The extra yield U.S. 10-year (USGG10YR) notes provided over Group of Seven counterparts reached 76 basis points this week, widening from this year’s low of 37 in February. It touched 78 basis points on July 31, the most since 2007.

Treasury 30-year bonds erased losses yesterday after the New York Times reported the Russian military has moved artillery units inside Ukrainian territory and is using them to fire at Ukrainian forces, citing NATO officials.

Trucks carrying what Russia said was humanitarian aid reached the embattled Ukrainian city of Luhansk after crossing the border in what the government in Kiev denounced as an “invasion.”

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

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

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