Treasuries rose as 10-year note yields at the highest levels in two months attracted buyers amid speculation the Federal Reserve may not start reducing its monthly bond purchases until next year.
The yield difference between five- and 10-year notes narrowed from the most in two years reached yesterday. Yields accounting for inflation were almost the highest in more than two years as bond rates increased while consumer prices remain subdued. The Treasury is scheduled to sell $96 billion in notes next week.
“You’ve seen a correction here,” said Sean Murphy, a trader at Societe Generale SA in New York, one of 21 primary dealers that trade with the Fed. There are “concerns over Fed tapering and possible policy movement going forward. The reality is it will take place. It’s a matter of what tools they add to ensure the onset of tapering doesn’t create a lot of volatility in the market.”
The benchmark 10-year yield fell four basis points, or 0.04 percentage point, to 2.74 percent at 5 p.m. New York time. The price of the 2.75 percent note maturing in November 2023 gained 11/32, or $3.44 per $1,000 face amount, to 100 2/32. The yield was up four basis points this week.
Hedge-fund managers and other large speculators decreased net-short position in 10-year note futures in the week ending Nov. 19, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 180,363 contracts on the Chicago Board of Trade, down 716 contracts from a week earlier.
Net-short positions in the five-year note fell to the lowest since Sept. 6. Speculative short positions outnumbered long positions by 55,118 contracts.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 54 percent to $193.65 billion from $420 billion yesterday. The 2013 average is $314.5 billion.
Volatility in Treasuries as measured by the Merrill Lynch MOVE Index was at 66.81 after reaching 58.31 on Nov. 18, the lowest level since May. It touched a record low of 48.87 on May 9 and a 2013 high of 117.89 on July 5.
Treasuries have fallen 0.7 percent this month through yesterday, according to the Bloomberg U.S. Treasury Bond Index. The yield will rise 2.91 percent by the end of March, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings.
The extra yield on 10-year notes versus five-year securities was 1.39 percentage points after expanding to 1.45 percentage points yesterday, the widest since August 2011.
“We’ve had a pretty dramatic steepening of the curve,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Maybe we’ve gone a little bit too far. The Fed can live with us in that 2.85 percent to 2.6 percent range.”
Treasury 10-year notes yielded about 1.78 percent after subtracting the cost of living, data compiled by Bloomberg show. The figure was as high as 1.84 percent yesterday, the most since February 2011, when the yield rose to 2.84 percent.
U.S. consumer prices rose 1 percent in October from the year before, the Labor Department reported on Nov. 20. It was the smallest increase since October 2009 as retailers started discounting before the holiday shopping season.
Ten-year yields climbed to the highest level in two months yesterday as a report showing U.S. jobless claims fell more than economists forecast fueled speculation that tapering will take place in coming months. Minutes of the Fed’s October meeting released Nov. 20 showed officials may reduce their $85 billion a month of bond-buying if the economy improves as anticipated.
The Fed purchased $1.57 billion in Treasuries maturing between May 2038 and February 2043 today.
“We expect the momentum in the jobs market to continue and that the Federal Reserve will start reducing bond purchases in the first quarter of next year,” said Alessandro Giansanti, a senior rates strategy at ING Bank NV in Amsterdam. “Tapering is just a matter of when and not if. Treasury yields have room to rise further.”
The Fed has said it will keep short-term rates at almost zero at least as long as unemployment is above 6.5 percent and the forecast for inflation is below 2.5 percent. The jobless rate in October was 7.3 percent.
The U.S. is scheduled to sell $32 billion in two-year notes, $35 billion in five-year debt and $29 billion in seven-year securities on three consecutive days starting Nov. 25.
The five-year notes to be sold may be considered an additional issue of the outstanding seven year notes sold Nov.30, 2011 if the auction results in a high yield ranging from 1.375 percent to 1.499 percent, according to the Treasury.
A sale of 10-year Treasury Inflation Protected Securities yesterday showed not everyone is ready to abandon them. The $13 billion auction attracted the strongest demand since 2011 from a group of investors that includes pension funds and insurers.
Direct bidders, non-primary-dealer investors that place orders directly with the Treasury, bought 21.5 percent of the notes, the most since September 2011, according to data compiled by Bloomberg.
The difference between yields on 10-year notes and same-maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, was 2.20 percentage points, in line with the average over the past decade.