Treasury 10-Year Yields Rise to Highest in Four Months

Treasuries dropped, pushing 10-year note yields to the highest level since October, a day after the Federal Reserve raised its assessment of the U.S. economy and sapped demand for the safety of government debt.

Ten- and 30-year yields rose past their 200-day moving averages for the first time since July, suggesting bond prices may decline further. A gauge of investor expectations for inflation climbed to the highest in seven months. Thirty-year bonds dropped before a $13 billion sale of the debt.

“Very few were expecting the changes that we got from the Fed’s language yesterday, so the fact that they were a little more upbeat was a negative for Treasuries,” said Anthony Cronin, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the U.S. central bank. “It helped break us out of the range that we’ve been in for the last four months or so.”

Yields on 10-year notes increased 11 basis points, or 0.11 percentage point, to 2.23 percent at 11:49 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 fell 29/32, or $9.06 per $1,000 face amount, to 97 30/32.

Ten-year note yields touched 2.25 percent, the highest level since Oct. 31, after trading between 1.79 percent and 2.09 percent this year until yesterday. The security’s 200-day moving average was 2.21 percent.

Thirty-year bond yields climbed as much as 11 basis points to 3.38 percent, also the most in more than four months. The 200-day moving average was 3.36 percent.

Yield Gap Widens

The difference in yields between and two- and 30-year securities increased to 299 basis points, the most since October. Two-year yields rose two basis points to 0.37 percent.

Volatility rose from the lowest level in more than four years. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, increased yesterday to 73.8 basis points, up from the previous day’s 69.9 basis points, the least since July 2007. The gauge rose as high as 117.8 on Aug. 8. The reading means traders expect a yield range of 73.8 basis points on an annualized basis in the next month.

Valuation measures show government debt is becoming less expensive. The term premium, a model created by economists at the Fed, was negative 0.43 percent today, the least since October. It touched negative 0.79 percent on Feb. 2, the most expensive ever, and compares with the average of positive 0.56 percent over the past decade. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Volume Increases

Treasury market volume rose yesterday to the highest level since Feb. 29 amid the Fed’s assessment of the economy. About $339 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, compared with the one-year average of $268 billion.

“There should be higher volumes over the next couple of days, and as we move into a new range, volume will peter down,” said Ira Jersey, an interest-rate strategist at the primary dealer Credit Suisse Group AG in New York. “The two parts that we are going to look at are today’s 30-year supply and where coupon payments get reinvested tomorrow. That will be pretty telling, where people put it.”

Investors should sell 10-year Treasury futures as economic conditions “continue to gradually improve,” according to Goldman Sachs Group Inc.

Futures expiring in June may fall to 126 from an entry point of 129 17/32, Francesco Garzarelli, co-head of fixed-income strategy in London, wrote today in an e-mailed report. Investors should end the trade should the securities close above 131 1/2, he said.

Quantitative Easing

Ten-year notes fell for a sixth straight day in their longest run of declines since October on a reduced likelihood of a third round of debt purchases by the central bank under quantitative easing. The Fed refrained yesterday from new moves to cut borrowing costs, saying the U.S. labor market is gaining strength.

“QE3 doesn’t seem to be coming down the pike any time soon,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.

The 10-year break-even rate, a gauge of the outlook for consumer prices derived from the difference between yields on conventional and inflation-linked bonds, touched 2.39 percentage points, a level last seen on Aug. 2.

Fed Inflation Gauge

A measure of traders’ inflation expectations that the Fed uses to help guide monetary policy was at 2.5 percent, the highest since March 1 and down from 3.23 percent in August. The five-year, five-year forward break-even rate, which projects annual price increases over a five-year period beginning in 2017, was below its 2.76 percent average for the past decade.

The U.S. central bank bought $1.11 billion today of Treasury Inflation Protected Securities maturing from April 2028 to February 2042 under its program to replace holdings of shorter-term securities with longer-term bonds. The Fed bought $2.3 trillion of securities in two rounds of quantitative easing from December 2008 to June 2011 to spur economic growth through lower borrowing costs.

The Treasury will auction $13 billion of 30-year debt today, capping note and bond offerings of $66 billion this week. The securities scheduled for sale yielded 3.355 percent in pre-auction trading, up from 3.24 percent the last time the bonds were sold on Feb. 9. Investors bid for 2.47 times the amount offered last month, the least since a November sale.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE