Treasury 10-year yields rose the most in a week since the beginning of July as investors bet the Federal Reserve may reduce its debt-purchase program next month as the economic recovery strengthens.
The difference between yields on five- and 10-year notes widened to almost the most in two years, suggesting investors are betting faster growth will lead to higher long-term borrowing rates. Hedge-fund managers and other large speculators increased wagers that 10-year note will drop to the most in more than a year.
“We’ve got a lot of turbulence,” said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald, one of 21 primary dealers that trade with the Fed. “You’ve got to respect the fact that there’s not a whole lot of willing buyers in Treasury land.”
U.S. 10-year note yields rose six basis points, or 0.06 percentage point, to 2.83 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.5 percent note maturing in August 2023 fell 16/32, or $5 per $1,000 face value, to 97 5/32.
The yield touched 2.86 percent, the highest since July 2011. It has increased 25 basis points this week, the most since the period ended July 5.
The Bloomberg Global Developed Sovereign Bond Index has fallen 5 percent this year, while yields were at the highest in at least a month for 17 of 24 developed markets tracked by Bloomberg.
Hedge-fund managers and other large speculators increased their net-short position in 10-year note futures in the week ending Aug. 13 to the most since July 2012, according to U.S. Commodity Futures Trading Commission data.
Speculative short positions, or bets prices will fall, outnumbered long positions by 66,432 contracts on the Chicago Board of Trade, the most since the week ending July 6, 2012. Net-short positions rose by 46,336 contracts, or 231 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.
The Thomson Reuters/University of Michigan index of consumer sentiment dropped from a six-year high amid rising interest rates. The index this month fell to 80 from 85.1 in July. The forecast was for little change at 85.2, according to the median projection of 68 economists in a Bloomberg News survey.
“The numbers are a little bit on the weak side, but not enough to change the mentality of the market right now,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “For right now the market has made up its mind in going to higher yields.”
The difference between yields on five- and 10-year notes increased to 1.25 percentage points, close to the widest since August 2011. The gap reached 1.27 percentage points on Aug. 6.
“A lot of people expect the Fed to taper in September; it’s probably the right thing for the Fed to do,” said Drew Matus, deputy U.S. chief economist at UBS Securities, one of 21 primary dealers that trade with the central bank. “In the long run, the Fed acknowledging the economy is strong enough to survive without continued rounds of easing should be considered net positive as we move ahead.”
Sixty-five percent of economists in a Bloomberg survey conducted Aug. 9-13 said the Fed will trim its $85 billion of monthly bond purchases at the next scheduled meeting Sept. 17-18. In a survey last month, half of respondents predicted a September reduction.
Investors see a 50 percent chance policy makers will raise the so-called federal funds rate to 0.5 percent or more by January 2015, data compiled by Bloomberg show.
The Fed has kept its target for overnight lending between banks in a range of zero to 0.25 percent since 2008.
The U.S. is scheduled to sell $16 billion in five-year Treasury inflation protected securities on Aug. 22. The last sale of the securities in April was for $18 billion.
Fed policy makers have warned of the risks of prolonged inflation below their 2 percent target even amid unprecedented stimulus. The cost of living in the U.S. rose in July for a third month, supporting the Fed’s forecast that inflation will move closer to its target, based on Labor Department data yesterday.
Consumer prices increased 2 percent in the 12 months ended in July after a 1.8 percent year-over-year gain the prior month.
Housing starts climbed 5.9 percent to an 896,000 annualized rate from a revised 846,000 pace in June that was higher than previously reported, figures from the Commerce Department showed. The median estimate of 82 economists surveyed by Bloomberg was for a 900,000 rate. Multifamily construction surged 26 percent, while work began on 2.2 percent fewer single-family homes.