Treasuries Drop as Fed Signals Easier Policy Is Not Imminent

Treasuries fell, snapping a two-day gain, as stock-market gains damped demand for bonds as a haven amid speculation further asset purchases by the Federal Reserve aren’t imminent.

Investors shunned Treasuries as yields near a 19-month low coupled with reports showing improved Chinese manufacturing and Australian economic growth spurred demand for riskier assets. Minutes of last month’s Fed meeting didn’t indicate what would prod the central bank to take further action to shore up the economy. Ten-year yields have fallen 25 basis points since the Aug. 10 meeting on bets policy makers would extend securities purchases. The MSCI World Index advanced 0.8 percent.

“The minutes suggested the Fed might be more cautious than some in the market thought about the quantitative-easing program,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “That and gains in stocks are probably two major factors that drive yields up today. But this is in a context that we’re still in a very low yield environment.”

The 10-year yield climbed four basis points to 2.52 percent as of 7:19 a.m. in New York, according to BGCantor Market Data. The 2.625 percent security due August 2020 slid 11/32, or $3.44 per $1,000 face amount, to 100 30/32.

The yield declined 18 basis points in the previous two days, the biggest back-to-back slide since Aug. 16, according to Bloomberg’s generic price data. It dropped to 2.42 percent on Aug. 25, the lowest level since January 2009.

Consumer Prices

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, rose one basis point to 1.56 percentage points. It has averaged 2.11 percentage points for the past five years.

Bonds also declined before the Treasury announces tomorrow the sizes of three debt sales next week.

The U.S. will auction $33 billion of three-year notes on Sept. 7, $21 billion of 10-year debt the following day and $13 billion of 30-year bonds on Sept. 9, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in U.S. government finance.

President Barack Obama has increased the U.S. publicly traded debt to a record $8.18 trillion as he borrows to sustain the economic expansion.

China’s manufacturing growth quickened in August and Australia’s economic expansion accelerated in the second quarter to the fastest pace since 2007, government reports from the countries showed.

Growth Slows

Treasuries surged this year as U.S. economic growth slowed. The 10-year yield fell 44 basis points in August, the biggest decline since December 2008 when the Fed cut its target lending rate to a range of zero to 0.25 percent.

U.S. debt has returned 8.8 percent this year, according to Bank of America Merrill Lynch indexes. MSCI’s World Index of shares handed investors a 5.6 percent loss after accounting for reinvested dividends.

“I’m bullish on government bonds, corporate bonds and high-yield bonds,” said Zeal Yin, who invests in dollar- denominated debt in Taipei at Shin Kong Life Insurance Co., Taiwan’s second-largest life insurer. “Falling yields will drive all of these bonds higher. The U.S. economy is bad. I don’t see anything to show that things will improve.” Bond prices and rates move in opposite directions.

Yin, who helps manage the equivalent of $46.8 billion, said he planned to buy U.S. 10-year notes with yields of 2.5 percent.

‘Bond Bubble’

Treasuries rallied yesterday as minutes of the Federal’s Reserve’s August meeting indicated some officials saw “increased downside risks” to the outlook for growth and inflation. Policy makers decided at the meeting to buy Treasuries as a way to keep borrowing costs down.

The Fed plans to snap up about $18 billion of securities by the middle of September in its first round of purchases, according to its website.

The yield on 30-year bonds rose 5 basis points to 3.57 percent today. It has declined 110 basis points since the start of this year.

Charles Morris, a fund manager overseeing $2.5 billion at HSBC Global Asset Management’s Absolute Return fund, said he sold the fund’s holdings of 25- and 30-year Treasuries on Aug. 27. He said “couldn’t sleep at night” on concern that the recent bond rally was overdone.

‘Market Overbought’

“The market is now very overbought,” Morris told Mark Barton on Bloomberg Television’s “Countdown” program. “Some people would interpret that as deflation expectation. We see it as a sign of a bond-market bubble. We got out of that trade and are sitting on the sideline.”

Treasuries with maturity longer than 10 years returned 21 percent so far this year, beating their short-dated counterparts which handed investors a 7 percent gain during the same period, according to indexes compiled by the European Federation of Financial Analysts’ Societies.

U.S. economic data are mixed. Consumer confidence climbed more than forecast in August, a private report showed yesterday.

An industry report today will say manufacturing expanded at the slowest pace in almost a year, according to a Bloomberg News survey of economists. Government data Sept. 3 will show the U.S. lost jobs for a third month, based on a separate survey.

Deutsche Bank AG, one of the 18 primary dealers required to bid at the Treasury auctions, amended its model portfolio for Asian bond investors to give the U.S. a greater weighting.

“We are moving to a more defensive position,” Martin Hohensee, a strategist for Deutsche Bank in Singapore, wrote in a report yesterday.

Deutsche Bank increased the portfolio’s exposure to dollars and extended the duration of its Treasury holdings to seven to 10 years, the report said. Duration is a measure of a bond’s sensitivity to changes in yield, and a larger number reflects a more bullish position.

The 10-year yield will advance to 3.01 percent by the end of the year, according to a Bloomberg survey of banks and securities companies.

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