Treasury 10-year note yields climbed the most since the start of the Iraq war as investors fled U.S. debt after the Federal Reserve predicted economic growth will be strong enough to allow policy makers to stop buying bonds.
Yields on the benchmark security for everything from mortgages to corporate loans climbed to the highest level in 22 months after Fed Chairman Ben S. Bernanke said policy makers may begin slowing bond purchases under quantitative easing this year and end them in mid-2014. U.S. growth may reach 3.5 percent next year, they said. Thirty-year bond yields rose the most in a week since 2009. The U.S. will sell $99 billion in notes next week.
“Bernanke surprised the markets, and now there is a real expectation in the market that curtailment will begin at some point,” said Dan Heckman, fixed-income strategist at U.S. Bank Wealth Management, which manages $110 billion. “Unless growth turns very negative and inflation moves much lower, I don’t think the Fed will back away from the tapering viewpoint.”
The 10-year yield increased 40 basis points, or 0.40 percentage point, to 2.53 percent this week in New York, according to Bloomberg Bond Trader prices. It was the most since March 2003, when U.S. and allied forces began an offensive against Iraq. The yield touched 2.55 percent, the highest since August 2011. The price of the 1.75 percent note due in May 2023 plunged 3 13/32, or $34.06 per $1,000 face amount, to 93 6/32.
Thirty-year bond yields rose 28 basis points, the most since August 2009, to 3.58 percent. They reached 3.6 percent, the highest level since September 2011.
The 10-year note yield may rise to 2.75 percent after closing yesterday above a technical level at 2.52 percent, according to Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. That’s the 61.8 percent Fibonacci retracement level from a July 1, 2011, high, he said. Fibonacci analysis is founded on the theory that prices tend to rise or fall by specific percentages after reaching a new highs or lows.
The level of “2.5 percent is psychologically significant, and 2.52 percent is technically significant,” Lyngen said. “If we are holding that level, it’s constructive for the market and we should consolidate in this new yield range of 2.3 percent to 2.5 percent. If we break the range, we could rise as high as 2.75 percent.”
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index climbed to 103.73 yesterday, the highest since November 2011. The daily average this year is 62.
“The market is adjusting to the new reality,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “People have been hiding in bond funds. Bond funds have been piggy-backing off the Fed. The adjustment process may take us a little further than you would think.”
The so-called term premium on Treasury 10-year notes rose to 0.27 percent, the highest since July 2011, according to a Columbia Management Investment Advisers LLC model. It turned positive this week for the first time since October 2011. The premium reached an all-time low of minus 0.64 percent last July.
Bernanke, speaking June 19 after a two-day meeting of the Federal Open Market Committee, said reducing bond purchases would depend on the economy achieving the central bank’s objectives. Policy makers are forecasting growth of as much as 2.6 percent this year and 3.5 percent in 2014.
U.S. gross domestic product increased an annualized 2.4 percent in the first quarter, a Bloomberg survey projected the government will say June 26 in its final estimate of the figure. Another Bloomberg survey estimated last week expansion of 1.7 percent in the second quarter.
The Fed has been buying $45 billion of Treasuries and $40 billion of mortgage securities every month to put downward pressure on borrowing costs in its third round of asset purchases since 2008.
The central bank will cut its monthly bond purchases to $65 billion at its Sept. 17-18 policy meeting, according to 44 percent of 54 economists surveyed by Bloomberg after Bernanke’s June 19 press conference. In a June 4-5 survey, only 27 percent forecast tapering would start in September.
The Fed left unchanged this week its statement that it plans to hold the key interest rate at almost zero, where it has been since 2008, as long as unemployment remains above 6.5 percent and the inflation outlook doesn’t exceed 2.5 percent. Bernanke said a rate boost is “far in the future.”
Fed-funds futures showed a 54 percent probability policy makers will raise the benchmark rate at its December 2014 meeting, versus a 14 percent chance at the start of last month.
The consumer price index rose 1.4 percent in May from a year earlier, the Labor Department reported on June 18, below the Fed’s 2 percent inflation target. CPI was at 2 percent in September 2012, when the Fed began its current purchase program.
The gap between yields on 10-year notes and Treasury Inflation-Protected Securities of comparable maturity, a gauge of traders’ expectations for inflation during the life of the debt known as the break-even rate, narrowed to 1.94 percentage points yesterday, the least since January 2012.
The Treasury will auction $35 billion in two-year notes on June 25, an equal amount of five-year debt the following day and $29 billion in seven-year securities on June 27.
It sold $7 billion in 30-year TIPS this week at a yield of 1.42 percent, the highest level in two years.