Treasury 10-year notes fell, with yields touching the highest level in nine months, on speculation the Federal Reserve will emphasize the need for continued monetary stimulus at the conclusion of today’s policy meeting.
Government bonds briefly pared losses after a report showed the U.S. economy unexpectedly contracted in the fourth quarter. Gross domestic product was restrained by the biggest plunge in defense spending in four decades and dwindling inventories as household purchases picked up, the Commerce Department said. The U.S. will auction $29 billion of seven-year securities, the last of $99 billion of note sales this week.
“The bond market is holding ground, waiting for the Fed’s report,” Adrian Miller, director of fixed income strategies at GMP Securities LLC in New York, said in a telephone interview. “The big question is if they will hint at if and when they will cut asset purchases. Until the report the market should stay within this tight range.”
The 10-year yield rose 0.2 basis points, or 0.02 percentage point, to 2.02 percent at 10:27 a.m. New York time, after touching 2.03 percent, the highest since April 25. The price of the 1.625 percent notes due in November 2022 fell 5/32, or $1.56 per $1,000 face value, to 96 16/32, according to Bloomberg Bond Trader data.
Fed Chairman Ben S. Bernanke’s latest round of bond buying will reach $1.14 trillion before he ends the program in the first quarter of 2014, according to the median estimate in a Bloomberg News survey of economists.
GDP, the volume of all goods and services produced, dropped at a 0.1 percent annual rate, weaker than any economist forecast in a Bloomberg survey and the worst performance since the second quarter of 2009, when the world’s largest economy was still in the recession. A drop in government outlays and smaller gain in stockpiles cut a combined 2.6 percentage points from growth.
“It’s a surprise -- it’s weaker than expected and there are aspects to it that need to be looked at,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “It’s positive for the Treasury market, relative to where we are, and there are lots of caveats.”
Treasuries fell earlier as the U.S. added 192,000 workers in January, data from the Roseland, New Jersey-based ADP Research Institute showed today. The median forecast of 38 economists surveyed by Bloomberg called for an advance of 165,000. Estimates ranged from gains of 120,000 to 235,000.
The 10-year term premium rose to minus 0.58 percent, the highest level since April 5, according to data compiled by Bloomberg. The measure dropped to a record minus 1.02 percent in July.
A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Policy makers said they may end their $85 billion monthly bond purchases in 2013, with members divided between a mid- or end-of-year finish, according to the record of the Federal Open Market Committee’s Dec. 11-12 gathering.
Investor speculation that the Fed will end its third round of quantitative easing in 2013 is overdone, Bank of America Merrill Lynch economist Michael Hanson and strategist Priya Misra wrote in a research note yesterday. The statement from the FOMC is likely to keep the central bank’s current policy stance in place, they said.
“Yields may rise a little bit higher while the risk-on trade continues,” said Kazuaki Oh’e, a bond salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “I don’t expect any large selloffs in Treasuries, given that the Fed meeting will confirm it will continue its bond-purchase program.”
The seven-year notes scheduled for sale today yielded 1.41 percent in pre-auction trading, up from 1.23 percent at the previous sale of similar-maturity securities on Dec. 19. That compares with a record-low auction yield of 0.954 percent on July 26.
The U.S. sold $35 billion of five-year notes yesterday at a yield of 0.889 percent, the highest since March. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 2.88 at auction, versus 2.72 last month.