Treasuries fell, with 10-year yields at almost the highest in more than a year, after Federal Reserve Bank of San Francisco President John Williams said the central bank’s bond buying under quantitative easing may end this year.
Thirty-year bonds declined for a third day amid speculation data this week will add to evidence the U.S. recovery is keeping its momentum. An index of U.S. factory output held steady in May, according to the median estimate in a Bloomberg survey, while a separate forecast says the U.S. economy added 166,000 jobs to nonfarm payrolls last month. The 10-year term premium, a measure of expectations for interest rates, growth and inflation, rose.
“With all with rhetoric going back and forth on Fed tapering or not, you really need to see NFP north of 200,000 to continue to see a bearish move in Treasuries,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.
Benchmark 10-year yields increased four basis points, or 0.04 percentage point, to 2.16 percent at 8:53 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due May 2023 fell 10/32, or $3.13 per $1,000 face amount, to 96 10/32. The yield on 30-year bonds climbed four basis points to 3.31 percent.
The 10-year yield rose to 2.23 percent on May 29, the highest since April 2012. It’s still less than the average of 3.58 percent for the past decade.
Williams, who doesn’t vote on monetary policy this year, told reporters in Stockholm that the Fed may start reducing the purchases by the summer and potentially conclude the quantitative-easing plan by year-end.
The Fed buys $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on interest rates. Chairman Ben S. Bernanke said May 22 the central bank could cut the pace of its purchases if officials see signs of sustained improvement in growth.
“Williams’ comments created a stir because he was seen by some as a dove,” said David Keeble, head of fixed-income strategy at Credit Agricole Corporate & Investment Bank in New York. “The U.S. data we’ve seen recently is in line with higher bond yields. We expect the tapering to take place in September, and the program to end mid-2014, with 10-year Treasury yields rising to 2.85 percent by the end of the year.”
U.S. government debt tumbled 2 percent last month, the most since December 2009, according to Bank of America Merrill Lynch indexes. Employment gains and increases in housing and consumer confidence suggested the recovery in the U.S. economy, the world’s largest, is gaining momentum, prompting traders to increase bets the Fed will scale back its asset purchases.
Global bond markets posted their biggest monthly losses in nine years in May. The Bank of America Merrill Lynch Global Broad Market Index, which tracks more than $40 trillion of bonds, fell 1.5 percent.
The U.S. economy’s projected new jobs in May more than matched the 165,000 gain in April, according to the median estimate of economists surveyed by Bloomberg News before the Labor Department report on June 7. Figures today may indicate manufacturing growth failed to pick up.
May’s bond rout has still left global yields short of the tipping point that would signal a bear market.
Yields on U.S. Treasuries, German bunds and Japanese government bonds are about one standard deviation above their historical norm. Treasury 10-year rates have reached two standard deviations above the average twice since 2009, and each time the notes rallied. While sovereign yields at 1.39 percent are above the record low of 1.14 percent set May 2, they are about half the 3.64 percent average of the past 20 years, based on Bank of America Merrill Lynch’s Global Government Index.
Bonds tumbled in May after Fed policy makers sent mixed signals about whether they would slow the pace of their debt buying this year. Tame inflation indicates the world’s central banks won’t pull back anytime soon, averting a further rout.
“You’d need much more than these sort of yield increases to hang your hat on to say this is a start of a bond bear market,” Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London, which oversees about $21 billion, said in a May 30 phone interview. “I’ve seen one in the early 1980s, and this doesn’t look like it. Inflation is still very low, and we need to see more convincing evidence of the economy strengthening, not just in the U.S. but elsewhere.”
Global inflation expectations, as measured by the gap in yields between index-linked and nominal government bonds, fell to 1.44 percentage points on May 31, the lowest in nine months, from a two-year high of 1.73 percentage points in April, according to data compiled by Bank of America Merrill Lynch.