Treasury 10-year notes declined for the first time in three days amid speculation a rally that pushed yields to a three-month low amid tumbling emerging markets and weaker U.S. data is losing momentum.
Bill Gross, manager of the world’s biggest bond fund, said he “continues to buy” U.S. debt and recommends four- and five-year Treasuries. Rates on bills due March 6 climbed to the highest level since March after the Treasury said it may exhaust extraordinary measures to fund the government at the end of February. Yields on benchmark 10-year notes rose as most emerging currencies advanced, damping demand for haven assets.
“Emerging markets are stabilizing and equities are positive, and that has taken some of the safe-haven buying out of Treasuries,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “You have to trade the range and be nimble in this type of market.”
U.S. 10-year note yields rose five basis points, or 0.05 percentage point, to 2.63 percent at 5 p.m. New York time, Bloomberg Bond Trader data show. The 2.75 percent note due in November 2023 fell 15/32, or $4.69 per $1,000 face amount, to 101 1/32. The yield dropped to 2.568 percent yesterday, the lowest since Nov. 1. It rose to 3.05 percent, a 2 1/2-year high, on Jan. 2.
The Treasury said it will suspend sales of its state- and local-government series of non-marketable securities, the first of extraordinary steps it can take to keep funding the government without breaching the nation’s debt limit. Suspension will start at noon New York time on Feb. 7, the Treasury said in an e-mailed statement today.
“I continue to buy and Pimco continues to buy what we think are the safest positions,” Gross, founder of Pacific Investment Management Co., said during an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “Front-end Treasuries -- buy four- to five-year Treasures. Do they yield much? No, they don’t yield much. But they are relatively safe as long as the Fed stays put.”
Gross said he expects new Federal Reserve Chairman Janet Yellen to keep the central bank’s main lending rate at zero to 0.25 percent, where it’s been since December 2008.
“That means four- and five-year notes basically return what they yield,” he said.
The five-year note yield rose three basis points to 1.47 percent after touching 1.43 percent yesterday, lowest since Dec. 5.
Rates on Treasury bills due March 6 rose three basis points to 0.135 percent before trading at 0.108. They jumped five basis points yesterday, the most since Oct. 15.
The Bloomberg U.S. Treasury Bond Index has gained 2.2 percent this year, following last year’s 3.4 decline, and the the Bloomberg Global Developed Sovereign Bond Index has climbed 2.1 percent in 2014, versus a 4.6 percent decline in 2013, reflecting demand for safety.
Ten-year yields reversed course after touching a three-month low yesterday. Their 14-day relative-strength index rose to 36 after touching 29.5 yesterday. A level below 30 suggests they may have fallen too far, too fast and be set to reverse course.
“We’ve moved so far so quickly, so you have to pay attention to technicals because the snapback could be pretty violent if you get a change of heart,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We’re very oversold in stocks and very overbought in Treasuries. It’s a ripe situation for a snap.”
The Standard and Poor’s 500 Index climbed 0.8 percent after sinking the most since June in New York yesterday. Japan’s Topix index fell 4.8 percent, the biggest decline in seven months. A Bloomberg customized gauge tracking 20 emerging-market currencies dropped to the lowest level since 2009 yesterday.
South Africa’s rand and Turkey’s lira led a recovery in emerging currencies today, each rallying at least 1.6 percent versus the dollar.
Emerging-market losses are “a small bump in the road, and this will not have any significant impact on our outlook, which is for rates to rise through most of 2014,” said Chris Gunster, head of fixed-income-portfolio management at U.S. Trust, which oversees $350 billion. “I don’t think the Fed is overly concerned about what’s happening in emerging markets.”
Money-market indicators in developed nations show no signs the turmoil in emerging markets triggered any strain in short-term funding conditions.
The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, averaged 15.1 basis points this year, nearly matching its average for 2013. This gap between the three-month London interbank offered rate and the overnight index swap rate surged to a record 364 basis points in October 2008, following the collapse a month earlier of Lehman Brothers Holdings Inc.
The difference between the U.S. two-year interest rate swap rate and the comparable-maturity Treasury note yield, known as the swap spread, was at 13 basis points, compared to 10.5 basis points at the start of the year. The spread, viewed as an indicator of investors’ perception of U.S. banking sector credit risk, reached in October 2008 a record 167.3 basis points.
“There are no signs of stress in U.S. money markets,” Brian Smedley, an interest-rate strategist at Bank of America Corp. in New York, said in a telephone interview. “In fact, there is so much cash in the system that the biggest problem in the short-term markets remains low rates. There is little evidence thus far that concerns about emerging markets have filtered into dollar-funding markets broadly.”
The U.S. will post the narrowest budget deficit this year as a share of the economy since 2007 as stronger growth boosts tax revenue, according to the Congressional Budget Office.
The deficit will decline to $514 billion this fiscal year, or three percent of gross domestic product, from $680 billion, or 4 percent of economic output in 2013. It is forecast to resume increases, reaching $1.074 trillion in a decade, the CBO said.