Treasuries fell, posting their steepest quarterly drop since the last three months of 2010, while corporate bonds surged as the world’s largest economy showed signs of improvement.
Thirty-year bond yields rose from a two-week low as investors sought higher-yielding assets after gains in consumer spending and confidence. U.S. government securities lost 1 percent since Dec. 31 as of yesterday, according to Bank of America Merrill Lynch indexes. An index of investment-grade and high-yield corporate bonds returned 3.2 percent, the most since July to September 2010
“It will be difficult for rates to sell off in a sustained fashion any time soon unless we get much higher and sustained growth rates, and by that I mean 3 percent and above,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, one of 21 primary dealers that trade with the Federal Reserve.
Thirty-year bond yields climbed six basis points, or 0.06 percentage point, to 3.34 percent at 5:05 p.m. New York time, according to Bloomberg Bond Trader prices. Earlier they fell to 3.25 percent, the lowest level since March 13. They have increased 44 basis points in 2012, the most since December 2010. The 3.125 percent securities due in February 2042 tumbled 1 5/32, or $11.56 per $1,000 face amount, to 96 1/32.
Ten-year note yields increased five basis points to 2.21 percent. The benchmark yields have climbed 33 basis points this quarter, the most in more than a year. They reached 2.40 percent on March 20, the highest level since Oct. 28, after touching a record low 1.67 percent in September. The average over the past decade is 3.86 percent.
“I’m hearing there’s pretty significant selling out the curve, selling 30s to buy fives,” 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. “This is more short-term play, rearranging the deck chairs ahead of the weekend and quarter-end more than anything else.”
Stocks advanced, with the Standard & Poor’s 500 Index increasing 0.4 percent.
The Fed said today it will buy about $44 billion in longer-term securities in April and sell about $43 billion in shorter-term Treasuries. The moves are part of a program to replace $400 billion of shorter-term debt in the bank’s holdings with longer maturities to hold down borrowing costs. It purchased $2.09 billion of Treasuries today maturing from February 2036 to August 2041 in its last acquisition in March.
The central bank bought $2.3 trillion of debt under two rounds of quantitative easing from December 2008 to June 2011 to support the economy.
Consumer spending in the U.S. rose in February by the most in seven months, with purchases climbing 0.8 percent, Commerce Department figures showed today. The median estimate in a Bloomberg News survey called for a 0.6 percent increase. Incomes advanced less than projected, sending the saving rate down to the lowest level in more than two years.
The Thomson Reuters/University of Michigan’s final index of consumer sentiment this month rose to 76.2, the highest since February 2011, from 74.3 in February.
“The U.S. has got some legs, at least for the next couple of quarters,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an interview on Bloomberg Television in Italy before the report. “There remain all sorts of issues, but I think the U.S. is going to continue to positively surprise.”
The increase in Treasury yields this year has brought them closer to the annual rate of inflation. Ten-year notes have a so-called real yield of minus 66 basis points, compared with minus 152 basis points at the end of 2011.
Ten-year yields will increase to 2.54 percent by year-end, according to the average forecast in a Bloomberg News survey of financial companies, with the most recent projections given the heaviest weightings.
Philadelphia Fed President Charles Plosser said the central bank may need to raise interest rates before late 2014 and additional stimulus isn’t necessary as the U.S. economy shows signs of strength.
“We should not anticipate additional accommodation,” Plosser said yesterday in Wilmington, Delaware. “In the absence of some shock that derails the recovery, we may well need to raise rates before the end of 2014.”
The Fed has said economic conditions will probably warrant keeping its benchmark rate at almost zero until at least late 2014. It has held its target for overnight lending between banks in a range of zero to 0.25 percent since December 2008.
Treasuries rose yesterday as investors sought the safest assets on speculation Europe’s debt crisis will worsen again. Greece will probably have to restructure its debt for a second time, Moritz Kraemer, head of sovereign ratings at Standard & Poor’s, said March 28.
European governments capped fresh rescue lending at 500 billion euros ($666 billion), after a Germany-led coalition opposed a further expansion of the region’s anti-debt-crisis firewall.
Adding the 300 billion euros already committed to Greece, Ireland and Portugal, euro-area finance ministers put the overall size of the firewall at 800 billion euros. In a statement, they ruled out using the 240 billion euros left in the temporary rescue fund to go beyond that.
Europe is counting on the sums pledged so far, plus a 1 trillion-euro cash infusion by the European Central Bank into the financial system, to persuade the rest of the world it’s doing enough to keep its two-year-old debt crisis at bay.