Treasuries fell, pushing yields on benchmark 10-year notes up from almost three-month lows, after the Federal Reserve said policy makers see improvement in economic activity while maintaining monthly bond purchases.
Government debt had rallied earlier as the Treasury’s auction of $29 billion of seven-year notes received the highest demand since May. The Fed removed a sentence from the previous policy-meeting statement that had said tighter financial conditions could slow the improvement in the economy.
“The market was looking for more of a dovish take,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “It was more upbeat than expected. Rates are lower today than they were at the last meeting, which will help fuel future economic growth.”
The 10-year note yield rose three basis points, or 0.03 percentage point, to 2.54 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It earlier fell three basis points to 2.47 percent. The 2 percent note due in September 2020 dropped 9/32, or $2.81 per $1,000 face amount, to 99 21/32.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $347.6 billion in New York, surpassing the 2013 average of $314 billion. Volume reached a 2013 high of $662 billion on May 22 and a low of $147.8 billion on Aug. 9.
The Fed’s $85 billion in monthly purchases will remain divided between $40 billion a month of mortgage bonds and $45 billion in Treasury securities.
Benchmark yields have fallen from a two-year high of 3.01 percent on Sept. 6 as traders bet the Fed would delay tapering until the first quarter, with a Bloomberg survey of analysts on Oct. 17-18 forecasting a March taper.
Jennifer Vail, head of fixed-income research of the Minneapolis based U.S. Bank Wealth Management, which oversees $110 billion, forecasts the Fed trimming its bond purchases starting in January.
“We were so close to tapering before, and the market is underestimating the growth trajectory and the Fed’s desire to taper,” Vail said during a visit to Bloomberg’s New York office. “A January taper would give the Fed a few months of clean data to look at, and we expect that data to be stronger.”
Ben S. Bernanke is pushing unprecedented accommodation into the final months of his Fed chairmanship as he seeks to shield the four-year economic expansion from the impact of higher borrowing costs and this month’s partial U.S. government shutdown. The 16-day closing resulted in the furloughs of as many as 800,000 federal workers and delayed release of data the Fed says it needs to evaluate the economy.
Fed officials decided at the September meeting to postpone a trim in their monthly bond buying after yields on 10-year notes rose to almost 3 percent at the beginning of the month from 1.63 percent in early May on expectations of a pullback.
The seven-year notes sold today drew a yield of 1.87 percent, the same as the forecast in a Bloomberg News survey of seven of the Fed’s primary dealers and the lowest since May. Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased the highest percentage on record.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.66, the highest since May and compared with an average of 2.6 for the previous 10 sales.
Direct bidders purchased 23.9 percent of the notes, compared with an average of 19.3 percent at the last 10 auctions. The previous high was Dec. 21, 2012.
Indirect bidders, an investor class that includes foreign central banks, purchased 42.3 percent of the notes, compared with an average of 40.5 percent for the past 10 sales.
Policy makers currently are falling short of their employment and price goals, with joblessness at 7.2 percent -- compared with 5 percent when the 18-month recession began in December 2007 -- and annual inflation rates missing their 2 percent target by a half percentage point or more every month since November, based on the personal-consumption-expenditures price index.
U.S. companies added 130,000 jobs in October, down from September’s 145,000 gain that was revised lower, figures from Roseland, New Jersey-based ADP showed today. The median forecast of 39 economists surveyed by Bloomberg called for an advance of 150,000.
A separate Labor Department report showed the consumer price index increased 0.2 percent in September, matching the median forecast of 86 economists surveyed by Bloomberg, after rising 0.1 percent the prior month. Overall consumer prices increased 1.2 percent in the 12 months through last month, the smallest gain since April.
The Fed has kept interest rates at almost zero since December 2008 and undertaken three rounds of bond buying that have swelled its balance sheet to a record of $3.66 trillion.
The Fed repeated that inflation “has been running below the committee’s longer-run objective but longer-term inflation expectations have remained stable.”
Price gains have lagged below the committee’s 2 percent long-run target. The cost of living rose as projected in September as fuel charges climbed, capping the smallest year-to-year gain in five months.
The consumer price index increased 0.2 percent after rising 0.1 percent the prior month, a Labor Department report showed today. The Fed’s preferred gauge of inflation, the personal consumption expenditures index, rose 1.2 percent in August and hasn’t breached 2 percent since March 2012.
Central-bank officials “want to see those inflation numbers come up a little bit,” Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 21 primary dealers that trade with the Fed, said in an interview on Bloomberg Television. “The Fed is still in risk-management mode, so they are going to continue to buy bonds.”