Treasury Yields Rise Most Since March on Budget Deal, Fed Views

Treasury 10-year yields soared the most since March in the first week of the year after the U.S. avoided the so-called fiscal cliff and Federal Reserve minutes showed policy makers differ over the scope of asset purchases.

The 10-year yield reached 1.97 percent yesterday, its highest level since April 26, before dropping after the Labor Department released a report showing the U.S. unemployment rate was unchanged at 7.8 percent in December. Several policy makers thought the Fed should curb its asset purchases, a policy known as quantitative easing, “well before the end of 2013,” according to a record of the central bank’s Dec. 11-12 meeting. The U.S. will sell $66 billion of notes and bonds next week.

“We’re past the fiscal cliff,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “The Fed told us they might be ending quantitative easing sooner than I and many other market participants were expecting. When you look at the bigger landscape, the market does seem to be setting up for a move higher in yields.”

The benchmark 10-year note yield rose 20 basis points, or 0.20 percentage point, to 1.90 percent this week in New York. The price of the 1.625 percent note due in November 2022 decreased 1 3/4, or $17.50 per $1,000 face amount, to 97 17/32, according to Bloomberg Bond Trader prices.

The jump in yield was the biggest since a 27-basis-point rise the week ended March 16, on expectations the economy was gaining strength.

Three Days

A separate report showed payrolls rose by 155,000 workers last month, following a revised 161,000 advance in November that was more than initially estimated, the Labor Department said in Washington. The median estimate of 82 economists surveyed by Bloomberg called for an increase of 152,000.

The 10-year yield rose 21 basis points in three days, Dec. 31-Jan. 3 -- the market was closed New Year’s Day -- the largest three-day rise in yield since the period from March 13-15, after the central bank raised its assessment of the economy and said strains in global financial markets had abated.

Treasury yields climbed on Dec. 31 on increasing optimism that Congress would reach a deficit deal and again on Jan. 2 after the House of Representatives voted in favor of the Senate’s budget legislation.

‘Rough Response’

U.S. government debt declined Jan. 3 after minutes of the Fed’s last meeting showed “several” policy makers thought the central bank should end its $85 billion monthly bond purchases before the end of 2013.

“The market had a very, very rough response to those FOMC minutes,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “It causes technical damage, people find themselves under water and a mortgage market that was 100 percent confident they’d have a full year worth of buying has to wonder about that.”

The central bank on Dec. 12 said it would hold borrowing costs low “at least as long” as the unemployment rate remains above 6.5 percent and inflation projections are for no more than 2.5 percent. The jobless rate had stayed above 8 percent since February 2009 until it broke the trend in September.

The central bank bought $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 in two rounds of purchases, known as quantitative easing, or QE.

Budget Deal

Risk appetite rose after Congress approved the deal to avoid raising taxes on 99 percent of Americans, averting $600 billion in automatic tax increases and spending cuts would have started this month, moves that the Congressional Budget Office said might lead to recession this year.

While Congress’s budget measure averts most of the immediate pain of more than $600 billion in tax increases and federal spending cuts, it is only one step toward controlling the federal deficit, an issue that will return with a February fight over whether and how the debt ceiling should be raised.

Volatility in Treasuries reached the highest level in almost two months on Jan. 3. Bank of America Merrill Lynch’s MOVE index, which measures price swings of U.S. government securities based on options, rose to 63.5 basis points, the most since Nov. 6. The 2012 average was 69.8 basis points.

Yields on 10-year debt gained 14 basis points in December, the biggest monthly increase since a 24-basis-point jump in March, as better-than-forecast economic data led to a 3.1 percent annual gross domestic product growth rate in the third quarter, beating the 2.8 percent forecast, the Commerce Department reported Dec. 20.

Term Premium

U.S. government securities traded this week close to the least expensive levels in eight months. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, touched negative 0.67 percent yesterday, the least costly since May.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average last year was negative 0.77 percent.

The Fed will sell $32 billion of three-year notes, $21 billion of 10-year notes and $13 billion of 30-year bonds over three days starting Jan. 8. The amounts are the same as at the previous auctions of the securities in December.

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