Treasury 10-year note yields were at almost an eight-month high in before the first auction of the securities this year on concern the Federal Reserve may wind down debt purchases earlier than most investors anticipated.
Yields on the benchmark securities soared the most since March last week after minutes from the Fed’s last meeting showed policy makers differed over the scope of purchases and several officials thought the Fed should end quantitative easing before year-end. The U.S. is selling $66 billion of notes and bonds this week, including $21 billion in 10-year debt in two days.
“The 10-year is relatively cheap on the curve -- it’s a relative value play,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “People are starting to get a sense that there’s a potential for rates to move higher. We have been at crisis levels for quite some time, with the Fed fueling those flames.”
The benchmark 10-year note yield was little changed at 1.90 percent as of 4:59 p.m. New York time, based on Bloomberg Bond Trader prices. It jumped to 1.97 percent on Jan. 4, the most since April 26. The 1.625 percent note maturing in November 2022 added 1/32, or 31 cents per $1,000 face value, to 97 18/32. The notes yielded 1.91 percent in when-issued trading.
The 30-year bond yielded 3.10 percent after reaching 3.18 percent on Jan. 4, the most since April 25, and yielded 3.11 percent in when-issued trading.
The U.S. debt auctions this week begin tomorrow with $32 billion in three-year notes and conclude Jan. 10 with $13 billion in 30-year bonds. The current three-year note yield was little changed at 0.39 percent and at 0.41 percent in when-issued trading.
“The auctions will go well at these levels,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “We’re finding a footing in here. We’ll probably get more of a concession.”
U.S. government securities traded today 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 0.69 percent. It reached negative 0.68 percent on Jan. 3, 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.
Economists cut their forecasts for Treasury yields in 2013 to the least since Bloomberg began compiling the predictions after data last week showed the unemployment rate was higher than expected. U.S. 10-year yields will rise to 2.14 percent by Dec. 31, according to a Bloomberg survey of banks and securities companies up to the end of last week.
The 10-year note yield touched the eight-month high Jan. 4 after the Labor Department said joblessness was 7.8 percent in December, higher than economist projections, even as the economy added 155,000 jobs. The employment figures tempered speculation the Fed will stop buying bonds this year, a strategy to spur the economy by putting downward pressure on benchmark interest rates.
U.S. growth will average 1 percent in the first half of 2013 and that is not enough to lower the 7.8 percent unemployment rate, Bill Gross, co-chief investment officer at Newport Beach, California-based Pacific Investment Management Co. wrote in a Twitter post today. Investors should buy five-year Treasuries, he said. The five-year yield was unchanged at 0.81 percent.
Four years after cutting the benchmark interest rate to virtually zero, Fed policy makers have expanded their third round of quantitative easing, or QE3, to include $40 billion in mortgage bonds and $45 billion in Treasuries. The central bank purchased $1.47 billion of Treasuries maturing from February 2036 to November 2042 today.
In the first two rounds of QE, from 2008 to 2011, the central bank bought $2.3 trillion in securities.
“Several” members of the policy-setting Federal Open Market Committee said it would “probably be appropriate to slow or stop purchases well before the end of 2013,” according to minutes of their Dec. 11-12 meeting released last week.
“We still have carry-over on the Fed question, particularly in terms of overseas,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “We sense that other investors globally will remain focused on Washington developments.”
Treasury volume dropped 54 percent to $185 billion as of 5:01 p.m. in New York, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Volume rose Jan. 4 to the most in almost four months to $404 billion in New York, the most since Sept. 13. Daily volume averaged $239 billion in 2012.
Volatility in Treasuries dropped today from near two-month highs. Bank of America Merrill Lynch’s MOVE index, which measures price swings of U.S. government securities based on options, was at 60 basis points, down from 63.5 basis points reached Jan. 3, the most since Nov. 6. The 2012 average was 69.8 basis points.