Treasuries dropped, pushing 30-year yields to a two-year high, after minutes of the Federal Reserve’s last meeting showed policy makers were “broadly comfortable” with a plan to curtail bond purchases.
Yields on benchmark 10-year notes approached the highest in two years as the minutes showed Fed officials supported Chairman Ben S. Bernanke’s plan to start reducing stimulus under quantitative easing later this year if the economy improves, with a few saying it might be needed soon. U.S.-registered bond funds lost $30.3 billion in August, a private report said.
“It does appear the markets are continuing to expect tapering,” said James Camp, managing director of fixed income in St. Petersburg, Florida, at Eagle Asset Management Inc., which oversees $27.8 billion. “The Fed wants out of QE. In the near-term we see a 3 percent handle.”
The Treasury 30-year bond yield climbed seven basis points, or 0.07 percentage point, to 3.92 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. It was the highest level since August 2011. The price of the 3.625 percent security due in August 2043 sank 1 1/8, or $11.25 per $1,000 face amount, to 94 26/32.
Ten-year yields increased eight basis points to 2.89 percent after advancing on Aug. 19 to 2.90 percent, the highest since July 2011.
“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” according to the record of the Federal Open Market Committee’s July 30-31 policy session released today in Washington.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, jumped 38 percent to $359 billion, the highest level since Aug. 15. The figure is down from a 2013 high of $662 billion reached on May 22 and up from a low of $148 billion on Aug. 9. The 2013 average is $313 billion.
Volatility as measured by the Merrill Lynch Option Volatility Estimate MOVE Index rose to 98.79, above the 2013 average of 68.5.
Fed policy makers next meet Sept. 17-18. They probably will vote to trim the stimulus program, according to 65 percent of economists surveyed by Bloomberg between Aug. 9-13.
“The bond market is selling off, as there was no bond-friendly news from the minutes,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “There wasn’t a very dovish discussion, it seems.”
Ten-year note yields have jumped about 30 basis points this month on speculation the U.S. economy is strong enough to prompt the central bank to slow stimulus as soon as next month.
“The Fed minutes were in line with expectations,” said Karim Basta, chief investment strategist and director of economic research at III Associates, a hedge fund that specializes in global fixed income, with more than $2 billion under management. “The most important message to come from the Fed minutes was that the higher yields we’ve seen have not materially changed their outlook on the economy.”
The FOMC affirmed a pledge on July 31 to continue bond buying until seeing signs “the outlook for the labor market has improved substantially.” While employers in July expanded payrolls by 162,000 workers, the least in four months, the jobless rate fell to 7.4 percent, the lowest level since 2008, according to Labor Department data.
Treasury losses this month are being matched by declines in mortgage-backed securities as the Fed prepares to reduce purchases of both securities.
U.S. sovereign and mortgage bonds have fallen 0.9 percent in August as of yesterday, according to Bank of America Merrill Lynch indexes. While both declined in May, June and July, Treasuries dropped more each time. Thirty-year fixed mortgage rates rose to 4.59 percent this week, approaching the highest level since May 2011, according to Bankrate.com.
Treasuries have lost investors 3.54 percent this year, according to Bloomberg U.S. Treasury Bond Index.
U.S.-registered bond mutual and exchange-traded funds lost $30.3 billion to investor redemptions this month, putting them on track for their slowest year since 2004, according to data from TrimTabs Investment Research.
The withdrawals for the month through Aug. 19 are already the third-highest on record, following $69.1 billion of withdrawals in June and $42 billion in October 2008, according to a report dated yesterday from TrimTabs, of Sausalito, California. Bond funds have suffered $4 billion in redemptions this year, on pace for the biggest withdrawals since investors pulled $7 billion in 2004.
Bill Gross, Pacific Investment Management Co.’s founder and co-chief investment officer, said the conclusion of quantitative easing will end bull markets.
“No more QE’s? No more bull markets,” Gross wrote in a posting on Twitter.
Treasury yields rose earlier as data showed sales of previously owned U.S. homes climbed in July.
Purchases advanced 6.5 percent to a 5.39 million annual rate last month, beating the 5.15 million median forecast of economists surveyed by Bloomberg, figures from the National Association of Realtors showed today in Washington.
Editors: Greg Storey, Dave Liedtka