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Treasuries Fall Second Day as Sales Data Fuel Bets Fed to Taper

Treasuries dropped the most in more than a week as U.S. retail sales increased for a fourth month, adding to speculation the economy is strengthening enough for the Federal Reserve to reduce its bond-buying program.

The yield gap between Treasury five- and 10-year notes widened to almost the most in two years after the Commerce Department said retail sales rose 0.2 percent in July. Fed Bank of Atlanta President Dennis Lockhart, who has backed the $85 billion in monthly purchases, said policy makers may start to slow buying at any of their next three gatherings amid “uneven performance” by the economy. They next meet Sept. 17-18.

“Retail sales was an OK number that doesn’t stand in the way of September tapering,” said Carlos Pro, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that trade with the central bank. “You probably have yields moving higher gradually as people position for tapering. The 2.55-to-2.75 percent range should hold through the remainder of August.”

The U.S. 10-year note yield climbed 10 basis points, or

0.10 percentage point, to 2.72 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It rose as much as 11 basis points, the biggest intraday jump since Aug. 1. The price of the 2.5 percent security maturing in August 2023 dropped 27/32, or $8.44 per $1,000 face amount, to 98 3/32.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 81.67. It touched

117.89 on July 5, the highest level since December 2010. The average for 2013 is 67.5.

‘Tapering Talk’

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 64 percent to $309.8 billion, from $188.44 billion yesterday. Volume has averaged $313.4 billion this year.

The increase in retail sales followed a 0.6 percent gain in June that was larger than previously reported. The median forecast of 81 economists surveyed by Bloomberg called for a 0.3 percent advance. The measure of demand that feeds into gross domestic product climbed by the most this year.

“The retail-sales number was good, and that accelerated the tapering talk,” said Dan Greenhaus, chief global strategist in New York at broker-dealer BTIG LLC. “It’s a thin trade.”

Yield Curve

The difference between yields on five-year notes and 10-year Treasuries widened to 1.24 percentage points, just below the 1.25 percentage points reached on Aug. 6, the most since August 2011. Historically, a steeper so-called yield curve signals investors are anticipating faster economic growth.

The difference between yields on U.S. 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to as much as 2.28 percentage points, the most since May 29.

Producer prices rose 2.4 percent in July from a year earlier, compared with 2.5 percent in June, according to a Bloomberg News survey before the Labor Department reports the data tomorrow. Consumer prices advanced 2 percent, quickening from 1.8 percent the previous month, another survey shows. The department is scheduled to report the figure on Aug. 15.

Investors in Treasuries were long in the week ended yesterday, betting that the prices of the securities will rise, according to a survey by JPMorgan Chase & Co.

Net Longs

The proportion of net longs was at 6 percentage points, according to JPMorgan. The survey was net neutral in the week ending Aug. 5.

The percent of outright longs, or bets the securities will increase in value, rose to 21 percent, from 15 percent. The percent of outright shorts remained at 15 percent. Investors cut neutral bets to 64 percent from 70 percent, the survey reported.

Treasuries have lost 2.6 percent this year through yesterday, while German securities dropped 1.4 percent and Japanese bonds returned 1 percent, based on Bloomberg World Bond Indexes.

The Fed won’t taper because of stronger growth, it will slow its purchases because of the fear of asset bubbles, Bill Gross, founder and co-chief investment officer of Pacific Investment Management Co., wrote in a Twitter post. The Standard & Poor’s 500 Index has climbed 23 percent this year, after rallying 13 percent in 2012.

‘First Step’

Fed policy makers are studying whether the economy is improving enough for them to trim the monthly bond purchases they use to pump money into the economy and put downward pressure on borrowing costs.

“The first adjustments to asset purchases, when they occur, should be the beginning of a process with steps that will be determined as later information arrives and certainty about the direction of the economy accumulates,” Lockhart, who doesn’t vote on monetary policy this year, said today in a speech in Atlanta. “A decision to proceed -- whether it is in September, October, or December -- ought to be thought of as a cautious first step.”

The central bank purchased $1.413 billion today of inflation-indexed securities maturing between February 2040 and February 2043.

“The July retail sales are in line with the economists and the Fed thinking --if economic data comes out less than horrendous, we’ll probably end up seeing reduced bond purchases,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed-income assets.

Yields on 10-year notes climbed to 2.75 percent on July 8, the highest since August 2011, after Fed Chairman Ben S. Bernanke said on May 22 policy makers “could take a step down in our pace of purchases.”

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