Treasuries declined for the first time in three days as investors weighed whether the U.S. economy was strong enough for the Federal Reserve to reduce bond purchases designed to hold down borrowing costs.
U.S. bonds slipped after homebuilder confidence climbed and a gauge of New York manufacturing rose before the Fed opens a two-day meeting in Washington tomorrow. Fed Chairman Ben S. Bernanke said in May the central bank could reduce its $85 billion in monthly bond purchases if there’s sustainable improvement in employment.
“The market is on edge and will probably take any mention about the possibility of reduced purchases pretty negatively,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed income assets. “The Fed is not ready to execute tapering yet. They may institute a strategy that allows them more flexibility.”
The benchmark 10-year note yield increased five basis points, or 0.05 percentage point, to 2.18 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It climbed to 2.29 percent on June 11, the highest since April 2012. The price of the 1.75 percent security due in May 2023 declined 14/32, or $4.38 per $1,000 face amount, to 96 5/32.
Prices extended declines after the Financial Times reported Bernanke will probably signal the central bank’s monthly purchases will be reduced, while further cuts will depend on the economy. The newspaper’s reporter later posted on Twitter that he didn’t have confirmation from Fed officials and urged investors to “chill out.”
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE Index rose to 84.75 on June 6 and June 10, the highest level since June 2012. It ended last week at 78.45.
Trading volume has been increasing, with the amount changing hands through ICAP Plc, the largest inter-dealer broker of U.S. government debt, averaging $393 billion a day since the start of May. That’s up from an average of $279 billion in the first four months of the year. It was $359 billion on June 14.
The Fed will release a statement and economic forecasts when its policy meeting ends on June 19, and Bernanke will hold a news conference.
“They’ve got to try to nuance this thing to try to sound like they will continue to be active in the market,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “At the same time, the economy is stronger and the idea of tapering is not necessarily tightening. Expect some volatility this week around that.”
The Fed is buying $45 billion of government bonds and $40 billion of mortgage securities each month to put downward pressure on borrowing costs and has kept its target for overnight lending between banks at almost zero since 2008. It purchased $5.51 billion of Treasuries today due from March 2018 to February 2019, according to the New York Fed’s website.
“Everybody is waiting for what the Fed’s going to say,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “I don’t think right now the data is clear enough that they are going to step back at this point. It’s very data-dependent.”
The U.S. is scheduled to auction $7 billion in 30-year Treasury Inflation Protected Securities June 20. It sold $66 billion in notes and bonds last week.
The difference between yields on 30-year notes and similar-maturity TIPS, a gauge of trader expectations for inflation over the life of the debt, was 2.14 percentage points, according to data compiled by Bloomberg. It touched 2.11 percentage points on June 13, the narrowest since May 2012.
A report tomorrow is forecast to show the U.S. consumer price index increased 1.4 percent in May from a year earlier, according to economists in a Bloomberg News survey. The central bank’s target is 2 percent.
The yield gap between 10- and 30-year Treasuries was 1.18 percentage points today after touching 1.19 on June 14, the widest on an intraday basis in three weeks. Its 2013 high was 1.3 percentage points on March 18, and the one-year average is 1.17. Historically, a so-called steeper yield curve reflects diminishing demand from investors anticipating faster economic growth and inflation.
The Fed Bank of New York’s general economic index climbed to 7.8 this month, the highest reading since March, from minus 1.4 in May. Readings greater than zero signal expansion in New York, northern New Jersey and southern Connecticut. The median projection in a Bloomberg survey was for a reading of zero.
The National Association of Home Builders/Wells Fargo index of builder sentiment rose to 52 this month, the highest since March 2006, the Washington-based group reported today. Readings above 50 mean more respondents said conditions were good.
Treasuries lost 1 percent this year through June 14, according to the Bloomberg U.S. Treasury Bond Index. Japanese government bonds returned 0.4 percent and German bunds fell 0.7 percent, separate indexes show.