Treasury 10-year note yields fell from almost the highest level in three weeks on speculation the Federal Reserve may keep its target interest rate at almost zero for an extended period when it starts stimulus cuts.
The difference between the yields on the five-year and 10-year notes widened to the most in more than two years. Benchmark 10-year debt rose as central-bank research backed holding interest rates lower for longer. Fed Bank of Cleveland President Sandra Pianalto said a tapering of bond-buying, known as quantitative easing, shouldn’t be seen as tightening policy.
“The two things driving the market are data and Fed thinking and discussion about tapering,” said David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors. “There’s probably still concern in the Fed about the actual health of the economy. Any thought about further delaying tapering is going to give a bid to Treasuries.”
The benchmark 10-year yield fell three basis points, or 0.03 percentage point, to 2.64 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.5 percent note due in August 2023 rose 7/32, or $2.19 per $1,000 face amount, to 98 25/32. The yield climbed to 2.68 percent yesterday, the highest level since Oct. 16.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $301.5 billion. It fell to a 2013 low of $147.8 billion on Aug. 9. The high was $662.3 billion on May 22.
Volatility in Treasuries as measured by the Merrill Lynch MOVE Index was at 67, lower than the 2013 average of 71.88.
The yield curve measuring the difference between five-year and 10-year notes widened to 1.31 percentage points, the most since August 2011.
“If the Fed reduces the threshold for the unemployment target, they will lock in zero rates for longer,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The amount required by an investor to hold that five-year Treasury security will also be lower. Lower rates for longer may eventually spur inflation, which would lead the 10- and 30-year sectors to underperform.”
The argument for a lower unemployment goal is supported in papers this week from Fed officials. The level of slack in the economy justifies an accommodative stance and the policy of seeking to drive down the U.S. jobless rate is effective, according to two separate papers by central-bank officials.
The strategy of not raising rates if unemployment is above 6.5 percent has provided effective stimulus, and an even lower threshold could be helpful, wrote William English, head of the Division of Monetary Affairs. A paper by David Wilcox, the research and statistics chief, said slack in the economy argues for loose policy at a time of contained inflation expectations.
The papers were posted on the International Monetary Fund’s website before a conference starting tomorrow in Washington. Senior staff members at the Fed write the briefing materials for Federal Open Market Committee meetings and draft the central bank’s policy options.
The Treasury announced it will sell $30 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds on three consecutive days starting Nov. 12. The $70 billion total is down from $72 billion the previous quarter.
The department said Nov. 4 it will borrow about 13 percent more this quarter than it projected three months ago to boost the nation’s cash balance on Dec. 31.
Issuance of net marketable debt will be $266 billion in the October-to-December period, compared with $235 billion initially forecast on July 29, the department said in Washington. At the end of December, the Treasury will have $140 billion in cash, versus $80 billion projected before.
Treasury said it will sell $10 billion to $15 billion of floating-rate notes Jan. 29. The floating-rate note sales would be the first added U.S. government debt security since Treasury Inflation-Protected Securities were introduced in 1997.
Matthew Rutherford, the Treasury’s assistant secretary for financial markets, told reporters that the floaters would be auctioned monthly, with four new offerings a year and two so-called reopenings of each.
“Floating-rate notes add another arrow to the Treasury’s quiver,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford Connecticut. “The securities will be attractive to people who buy bills. There won’t be much overlap with the coupon market. Success will be determined by their ability to attract new investors.”
Treasuries gained 1.1 percent from Sept. 17 through yesterday, according to Bloomberg World Bond Indexes. That was the day before the Fed unexpectedly refrained from reducing stimulus and said it needed more evidence of lasting improvement in the economy. U.S. government securities have still declined 2.4 percent this year, the indexes show.
The Fed buys $85 billion of bonds each month to put downward pressure on borrowing costs. It purchased $3.17 billion in Treasuries maturing from November 2020 to August 2023 today.
Gross domestic product grew at a 2 percent annual rate in the third quarter after a 2.5 percent pace from the previous period, according to a Bloomberg survey before the Commerce Department report tomorrow. Employers added 120,000 jobs in October, economists predicted before the Labor Department data on Nov. 8. Employment increased 148,000 in September.
The Cleveland Fed’s Pianalto said she sees “meaningful progress” in U.S. labor markets and the central bank should “be cautious” in asset purchases. Housing continues to hold back economic growth, she said Columbus, Ohio.