Treasuries rose for the first time in three days amid speculation an increase in 10-year yields to the highest in almost two years had been too rapid.
Yields surged on July 5 by the most since August 2011 after data showing an increase in U.S. payrolls boosted speculation the Federal Reserve will curb its bond-buying program later this year. Goldman Sachs Group Inc. said 10-year yields will reach 4 percent by 2016. The Treasury plans to sell $66 billion of notes and bonds this week.
“Investors saw the rise in yield as a buying opportunity,” said Michael Pond, head of global inflation-linked research at Barclays Plc, one of 21 primary dealers that trade directly with the Fed. “The selloff into this week was too strong. The data was positive, but given the state of the economy, we may have moved too fast.”
The benchmark 10-year yield declined 10 basis points, or 0.10 percentage point, to 2.64 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due May 2023 rose 26/32, or $8.13 per $1,000 face amount, to 92 11/32. The yield earlier climbed to 2.75 percent, the highest level since August 2011.
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index ended last week at 117.89, the highest since December 2010. The one-year average is 63.6.
“The initial selling pressure has run its course and we’re in the process of defining a new, slightly higher yield range,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We had a very solid selloff on a shift in fundamental data. What we got was confirmation that the Fed is now on course to start tapering in September, and the market priced to that.”
The 10-year yield’s 14-day relative strength index fell to 67 after rising to 77 on July 5, above the 70 level some traders see as a sign that a reversal is imminent.
U.S. government debt has lost 3.5 percent this year, Bank of America Merrill Lynch indexes show. The only bigger annual decline was in 2009, when they dropped 3.7 percent, based on data that go back to 1978.
“We are revising up our 10-year yield forecasts for the U.S. by 25 basis points across the forecast horizon out to end-2016,” Francesco Garzarelli, co-head of macro and markets research at Goldman Sachs in London, wrote in a client note dated yesterday. “We now see yields entering 2014 at 2.75-3 percent, roughly in line with the forwards and our model estimates, and climbing to 4 percent by 2016.”
The Labor Department report on July 5 showed the U.S. economy added 195,000 jobs in June, compared with the median forecast of 165,000 in a Bloomberg News survey of analysts.
Bernanke said last month that policy makers may “moderate” their asset-purchase program this year and end it in mid-2014 if economic growth meets their forecasts.
The Fed is buying $85 billion of Treasuries and mortgage-backed securities each month to support the economy by putting downward pressure on borrowing costs. It purchased $1.46 billion in securities today maturing between February 2036 and August 2042.
The Fed on July 10 will release minutes of its June 18-19 policy makers’ meeting.
“We will be able to get a feeling of how many members on the committee were talking about tapering -- how many guys were ready to pull the trigger,” said Charles Comiskey, head of Treasury trading in New York at primary dealer Bank of Nova Scotia. “Things have changed somewhat because of the data we’ve gotten since then.”
The U.S. is scheduled to sell $32 billion of three-year notes tomorrow, $21 billion of 10-year debt the following day and $13 billion of 30-year bonds on July 11.
A previous auction of the three-year securities on June 11 drew a yield of 0.581 percent, the highest level at an auction of the notes since July 2011. The current securities traded at 0.7 percent.
The biggest investors in Asia and Europe have decided to keep their money in Treasuries even after the steepest two-month loss for the securities erased $317 billion of market value.
Mizuho Asset Management Co., which oversees $32 billion, added Treasuries due in 10 years or longer to its holdings in the past month. HSBC Private Bank, with $480 billion in assets, bought U.S. notes when 10-year yields rose to 2.5 percent. Deutsche Asset & Wealth Management, which manages about $1.3 trillion, is holding debt maturing in less than four years, betting American interest rates will remain subdued.
After doubling holdings of Treasuries to $5.6 trillion in the past five years, overseas investors are resisting the market’s 3.2 percent slump in May and June and last month’s record $79.8 billion of withdrawals from bond funds. Since the Fed signaled it may slow the pace of asset purchases this year, the world’s biggest and most actively traded debt market now offers the highest yields relative to other developed nations in three years.