Treasury 10-year notes fell, pushing yields toward the highest levels since 2011, after a comment by Federal Reserve Governor Jeremy Stein fueled speculation the central bank may start to reduce its bond buying in September.
Bonds extended a loss earlier as Richmond Fed Bank President Jeffrey Lacker said he’s against continuing bond purchases. Stein said policy makers should concentrate on the amount of economic progress made since the buying program began “in making a decision in, say, September.” Fed Chairman Ben S. Bernanke said June 19 bond purchases may be cut this year and ended in 2014 if growth is in line with central-bank estimates.
“The markets have been very volatile, and they remain very sensitive to Fed communication and economic data,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “These levels are justified as the market prices in more normal yields without participation by the Fed. The market is not patient, as no one wants to be the last one out the door.”
Benchmark 10-year yields rose one basis point, or 0.01 percentage point, to 2.49 percent at 5 p.m. New York time, after reaching 2.55 percent, according to Bloomberg Bond Trader prices. They touched 2.66 percent on June 24, the highest since August 2011. The yields fell five basis points this week.
The price of the 1.75 percent securities due in May 2023 declined 3/32, or 94 cents per $1,000 face amount, to 93 19/32.
Thirty-year yields rose as much as four basis points to 3.58 percent before declining to 3.5 percent. They touched 3.65 percent on June 24, the highest since September 2011.
Hedge-fund managers and other large speculators increased their net-short position in 30-year bond futures to the most since March 2012, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 29,604 contracts on the Chicago Board of Trade in the week ending June 25.
Speculators increased their net-long position in 10-year note futures, which outnumbered short positions by 33,011 contracts on the Chicago Board of Trade.
Treasuries pared losses after the MNI Chicago Report’s business barometer declined to 51.6 this month, from 58.7 in May. A reading of 50 is the dividing line between expansion and contraction. The median forecast of economists in a Bloomberg survey was for 55.
The Thomson Reuters/University of Michigan final index of U.S. consumer sentiment fell to 84.1 in June from 84.5 in May.
Treasuries lost 1.4 percent this month through yesterday, according to the Bloomberg U.S. Treasury Bond Index. The Standard & Poor’s 500 Index returned 14 percent in that period, including reinvested dividends. U.S. government securities have slid 2.3 percent this quarter and 2.6 percent this year, the Bank of America Merrill Lynch U.S. Treasury Index showed.
Stein said Fed officials should not put undue weight on the most recent releases of economic data. They should “be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting,” Stein said in a speech in New York.
“The use of the word September has got people in a bit of a tizzy,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York.
Lacker said he opposes continuing asset purchases because they aren’t worth the risk, and that markets will remain volatile as policy makers debate how and when to curtail the program. Speaking at a judicial conference in White Sulphur Springs, West Virginia, Lacker said financial markets will remain volatile as policy makers debate how and when to curtail bond buying.
San Francisco Fed President John Williams, who has never dissented from a policy decision, said “it’s still too early” for the central bank to begin trimming bond-buying.
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility MOVE Index climbed to 110.98 on June 24, the highest level since November 2011. It was at 97.13 yesterday, versus an average of 62.9 over the past year.
Fed policy makers at their June 18-19 meeting forecast economic growth of as much as 2.6 percent this year and 3.5 percent in 2014.
The central bank is purchasing $85 billion of Treasuries and mortgage bonds every month to put downward pressure on borrowing costs during the third round of its quantitative-easing stimulus program. It bought $1.5 billion in Treasuries today maturing from February 2036 to November 2042, from $2.8 billion submitted by dealers.
The Fed has kept its benchmark interest-rate target at zero to 0.25 percent since 2008 to support the economy.
“While the Fed debate continues to be influenced by headlines from a variety of Fed speakers, the takeaway at this point is that we are in a largely data-dependent mode with more than a couple of months of inputs to come before it’s clear whether tapering will begin,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.
Labor Department data next week will show employers added 165,000 workers in June, after payrolls swelled by 175,000 in May, and the unemployment rate fell to 7.5 percent, from 7.6 percent, according to Bloomberg surveys of economists before the figures are released on July 5.
“Our forecasts for U.S. payrolls to rise by 165,000 and for a tenth to be shaved off the unemployment rate are unlikely to shake-up expectations of the taper track,” Bank of America Merrill Lynch strategists including Michelle Meyer in New York wrote in an e-mailed report today. “This should allow U.S. rates volatility to calm somewhat.”