Treasuries tumbled, pushing 30-year bond yields to the biggest weekly jump in three years, as the Federal Reserve’s pledge to keep adding stimulus even as the economy strengthens fueled concern inflation will accelerate.
The yield gap between long bonds and comparable Treasury Inflation Protected Securities, an indicator of traders’ outlook for consumer prices over the life of the debt, widened to the most in 13 months after a report showed the cost of living in the U.S. climbed in August by the most in more than three years. Relative yields on mortgage securities tumbled to the lowest on record after the Fed said yesterday it would expand its holdings with monthly purchases of $40 billion of the debt.
“The central-bank policies are inflationary,” said Dan Mulholland, head of U.S. Treasury trading in the capital markets unit of BNY Mellon Corp. in New York. “Therefore the long end of the curve has lost sponsorship. The Fed really put the bazooka into the market yesterday with the monetary policy they are pursuing.”
The 30-year bond yield climbed 16 basis points, or 0.16 percentage point, to 3.09 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices, and touched 3.11 percent, the highest level since May 4. It increased 26 basis points this week, the most since August 2009. The price of the 2.75 percent security maturing in August 2042 slid 2 31/32, or $29.69 per $1,000 face amount, to 93 13/32.
Thirty-year bonds, because of their long maturity, are more sensitive to inflation than shorter-dated Treasuries.
Benchmark 10-year note yields rose 14 basis points to 1.87 percent. They climbed as much as 17 basis points, the biggest one-day jump since August 2011. The yields added 20 basis points this week, the most since March 16.
The difference in yields between 30-year bonds and TIPS touched 2.67 percentage points, the most since August 2011, versus an average of 2.47 percentage points over the past decade. The gap is known as the 30-year break-even rate.
“The shift in the Fed’s stance toward inflation justifies the move we’ve seen, and then some,” said Mike Pond, head of global inflation-linked research in New York at Barclays Plc, one of the 21 primary dealers that trade with the central bank. “The market is reacting to how monetary policy is conducted.”
Stocks and commodities rose as risk appetite swelled. The Standard & Poor’s 500 Index gained 0.4 percent, and S&P’s GSCI index of raw materials rallied 1 percent.
A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value fell about one basis point to 92 basis points higher than an average of five-and 10-year Treasury rates as of 3 p.m. in New York. That’s the narrowest spread since at least 1984.
Treasuries were the most volatile among developed-market government bonds today, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps.
TIPS have returned 6.2 percent this year, versus 1.7 percent for Treasuries that do not provide inflation protection, according to Bank of America Merrill Lynch indexes. Thirty-year bonds gained 0.9 percent, based on the gauges.
The U.S. consumer price index rose in August 0.6 percent from the previous month, the biggest increase since June 2009, and advanced 1.7 percent from a year earlier, the Commerce Department said today. The figures matched the forecasts in a Bloomberg News survey.
Treasuries were the least expensive in three weeks, according to the 10-year term premium, a model created by Fed economists that includes expectations for interest rates, growth and inflation. The gauge was at negative 0.81 percent, the least costly level since Aug. 21. A negative reading shows investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.73 percent.
Bonds remained lower even after Fed figures showed U.S. industrial production shrank in August by 1.2 percent, the most since March 2009. The decrease at factories, mines and utilities followed a revised 0.5 percent increase in July.
Fed Chairman Ben S. Bernanke is trying to bring down an unemployment rate stuck above 8 percent since February 2009. The central bank said yesterday it will make open-ended purchases of mortgage debt under the quantitative-easing stimulus strategy.
“We’re looking for ongoing, sustained improvement in the labor market,” he said at a press conference yesterday in Washington following the conclusion of a two-day meeting of the Federal Open Market Committee.
The FOMC said it probably will hold its target for overnight lending between banks near zero through mid-2015. A “highly accommodative stance of monetary policy will remain appropriate for a considerable time” after the economic recovery gains steam, it said.
“The Fed’s having QE on cruise control and is only focused on one side of their mandate, employment,” said Jacob Oubina, a senior U.S. economist in New York at the primary dealer Royal Bank of Canada’s RBC Capital Markets unit. “The Fed is willing to let inflation run above their target at this point, and that should lead to higher yields on the back end.”
The central bank’s mandate from Congress is to aim for both maximum employment and stable prices.
The Fed also said it will maintain its Operation Twist program of swapping $667 billion of shorter-term Treasuries in its holdings by year-end with debt due in six to 30 years to hold down long-term borrowing costs. It purchased $1.5 billion of debt today maturing from February 2036 to August 2042.
Treasury volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 61 percent yesterday to $464 billion in New York, the highest level in 13 months. It was $370 billion today. Daily volume has averaged $240 billion in 2012.
The Treasury market is telling “a tale of two curves” as the 30-year bond yield broke through its 200-day moving average faster than 10-year note yields did, according to CRT Capital Group LLC.
Thirty-year yields are rising faster than those of shorter-term Treasuries because investors see diminishing support for long bonds, David Ader, head of government bond strategy at CRT in Stamford, Connecticut, said in an interview. The Fed refrained from announcing additional purchases of them when Operation Twist expires, and inflation expectations are rising, he said.
The 30-year bond yield’s 200-day moving average was 2.94 percent today. The 10-year yield’s 200-day moving average was 1.83 percent.