Treasury 10-Year Notes Snap Longest Drop Since 2006

Treasuries Fall in Longest Run of Declines Since at Least 1985
The U.S. Treasury Philadelphia Finance Center. Photographer: Dennis Brack/Bloomberg

Treasuries rose, pushing 10-year note yields down from four-month highs and ending a nine-day decline that was the longest run of losses since 2006, as yields climbed to levels that lured investors.

The benchmark notes dropped earlier for a 10th consecutive trading day in what would have been the longest run of declines since at least 1985. The Federal Reserve bought $1.97 billion of Treasuries today in a program to lower borrowing costs. Fed Chairman Ben S. Bernanke said one lesson from the Great Depression is to avoid moving quickly in reversing Fed policy.

“The market is taking a bit of a breather after testing the 2.4 percent level yesterday,” 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. “We are in a new range from 2.1 percent to 2.4 percent.”

Yields on 10-year notes fell two basis points, or 0.02 percentage point, to 2.36 percent at 5:03 p.m. New York time, according to Bloomberg Bond Trader prices. Earlier they slid to 2.33 percent and rose to 2.4 percent, the highest level since Oct. 28. The 2 percent securities due in February 2022 gained 5/32, or $1.56 per $1,000 face amount, to 96 27/32. They traded this year between 1.79 percent and 2.09 percent until March 13.

Ten-year Treasury notes yielded 11.9 percent on March 20, 1985, down from the record high of 15.8 percent reached in September 1981, according to data compiled by Bloomberg. Ronald Reagan had been sworn in for a second term as president two months earlier, while Paul Volcker served as Fed chairman.

Below 2011 High

While 10-year yields were up 27 basis points last week, they’re still below last year’s high of 3.77 percent and their average of 3.87 percent over the past decade.

The 14-day relative strength index for 10-year yields was 74.2 today, exceeding 70 for a fifth day. A reading above that level indicates to some traders that a gain in the yields may be hard to sustain.

“The market is trying to establish fair value for Treasury debt,” said Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York.

Valuation measures show government debt is trading near the least expensive level since October. The term premium, a model created by economists at the Fed, was negative 0.27 percent. It dropped to negative 0.79 percent on Feb. 2, the most expensive ever. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

‘Fundamental Shift’

“There’s been a fundamental shift in the market,” said George Goncalves, head of interest rate strategy at Nomura Holdings Inc., one of 21 primary dealers that trade with the U.S. central bank. “The market looks broken. There’s really no support other than the Fed.”

Thirty-year bond yields declined three basis points to 3.45 percent after increasing yesterday to 3.49 percent, the highest level since September.

Stocks pared losses. The Standard & Poor’s 500 Index ended the day down 0.3 percent after dropping as much as 0.9 percent.

Treasury investors in a weekly survey by JPMorgan Chase & Co. increased bets the price of the securities will rise.

The percent of “net longs” rose to 10 in the week ended yesterday, according to the survey. The decline in the level of outright shorts, 8 percent, was the largest since Feb. 13, the firm said in a statement.

Last week, investors bet for the first time since January that the price of the securities would drop. The survey shifted to a “net short” position for the first time since Jan. 3.

Volatility Rises

Volatility climbed to the highest level this year. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, increased to 93.3 basis points, the most since Dec. 29.

Volume declined today, with about $284 billion of Treasuries changing hands through ICAP Plc, the world’s largest interdealer broker, as of 5:01 p.m. It rose yesterday to $303 billion. Volume reached $439 billion on March 14, the highest since August. The average daily volume over the past year is $268 billion.

The Treasury will announce on March 22 the amounts it will auction in two-, five- and seven-year debt next week on three consecutive days beginning March 27. The government will sell $13 billion in 10-year Treasury Inflation Protected Securities on March 22.

The Fed raised its assessment of the economy last week while reiterating it plans to keep the target lending rate at virtually zero through at least late 2014.

Comfort Level

Central-bank policy makers need to be relatively comfortable with where the economy is going before reversing policy, Bernanke said today in Washington. He spoke in the first of four lectures on the history of the Fed that he’s delivering at George Washington University.

The Fed bought Treasuries today maturing from February 2036 to February 2042 as part of its effort to replace $400 billion of shorter-term securities in its holdings with longer-term bonds through June. Traders dubbed the program Operation Twist after a similar plan in the 1960s.

Treasuries rose earlier as BHP Billiton Ltd., the world’s largest mining company, said China’s steel production is slowing, underpinning demand for the safest assets. China increased gasoline and diesel prices for the second time in less than six weeks amid speculation the move will damp growth.

Housing starts in the U.S. fell in February from a three-year high. Builders broke ground on 698,000 homes at an annual rate, in line with the median forecast in a Bloomberg News survey and down 1.1 percent from a January pace that was stronger than previously reported, Commerce Department figures showed.

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