Treasuries pared advances as stocks increased and the Federal Reserve concluded purchases of $14.6 billion in debt, the biggest amount in a single day under the second round of quantitative easing.
Government bonds strengthened earlier as the central bank bought debt maturing from 2018 to 2020 and from 2014 to 2016. The 10-year note yield touched a seven-month high last week on speculation the U.S. extension of tax cuts will spur economic growth and widen the budget deficit.
“I don’t think there’s a buyer on strength except for the Fed,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 18 firms that trade directly with the Fed. “The market just falls on its own weight when that happens.”
The benchmark 10-year note yield advanced less than one basis point, or 0.01 percentage point, to 3.34 percent at 5:08 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 fell 2/32, or 63 cents per $1,000 face amount, to 94 1/32.
The gain earlier today pushed the yield to 3.25 percent, the lowest level since Dec. 10. The yield rose to 3.56 percent on Dec. 16, the highest level since May 13.
The Standard & Poor’s 500 Index advanced 0.3 percent after earlier dropping 0.2 percent. Crude oil prices strengthened 0.9 percent to $88.81 a barrel.
“When investors sell Treasuries to the Fed, they’re not necessarily taking that money and reinvesting it in the Treasury market,” said Jeff Given, part of a group that manages $18 billion of bonds at MFC Global Investment Management in Boston. “They’re going to buy riskier assets.”
The central bank acquired today $7.790 billion of Treasuries due from February 2018 to August 2020 and $6.779 billion of debt maturing from December 2014 to May 2016.
The amount purchased was the largest since the Fed restarted the program after completing $1.7 trillion in debt purchases in March. The central bank will buy as much as $11 billion of debt in a pair of operations tomorrow and $2.5 billion on Dec. 22.
The Fed said it will limit its debt purchases to 70 percent of any single Treasury security as part of its plan to expand its balance sheet under quantitative easing. The central bank had temporarily relaxed its 35 percent limit in November when it announced additional purchases of $600 billion of Treasuries through June.
Flatter Yield Curve
U.S. government bonds have fallen this month as the gap between yields on longer-maturity Treasuries showed the Fed’s second round of quantitative easing may be its last.
The difference between 10- and 30-year yields shrank to 1.05 percentage points on Dec. 15 from a record 1.60 percentage points on Nov. 10, the fastest contraction since the 1980s, according to data compiled by Bloomberg. The shift in the yield curve is taking place as Bank of America Merrill Lynch index data show U.S. bonds due in 10 years or more lost 4.64 percent this month, trimming 2010’s gain to 8.37 percent.
Flattening usually foreshadows the end of Fed interest-rate cuts aimed at stimulating growth. U.S. reports this month showed gains in retail sales and consumer confidence.
“A peak in the yield spread between 10s and 30s signals the end of an easing cycle,” said Steven Wieting, managing director of economic and market analysis at Citigroup Inc., a primary dealer.
The economy grew 2.8 percent in the third quarter from a year earlier, according to the median forecast of 61 economists before the Commerce Department’s report Dec. 22. That’s faster than the 2.5 percent estimate issued last month. Gross domestic product advanced 1.7 percent in the second quarter.
Bonds also gained earlier as South Korea said a live-firing drill that drew threats of retaliation from North Korea was completed without incident, after the United Nations Security Council failed to agree on steps to ease tension.
Fund managers in a weekly survey by Ried Thunberg ICAP became less bearish on the outlook for Treasuries through March. Ried’s sentiment index rose to 48 for the seven days ended Dec. 17 from 46 the week before. A figure less than 50 indicates investors expect prices to fall.
The company, which is a unit of the world’s largest interdealer broker and based in Jersey City, New Jersey, surveyed 26 money managers controlling $1.38 trillion.