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Treasuries Post Monthly Loss as Fed Flattens Yield Curve

U.S. Treasury Building
Pedestrians pass the U.S. Treasury in Washington, D.C. Photographer: Andrew Harrer/Bloomberg

March 29 (Bloomberg) -- Treasuries are losing money for the first time since December as investors demand higher yields with the Federal Reserve signaling that a strengthening economy may prompt policy makers to raise rates sooner than forecast.

The difference in yields between five- and 30-year securities narrowed to the least this month since 2009 as investors shift to longer-maturity debt, which is less sensitive to changes in central bank rates. A report next week is forecast to show the U.S. added 197,000 jobs in March, the most since November, while the unemployment rate dropped.

“The fear of higher rates in the near term played havoc on the front end of the curve, and the market wasn’t ready for that,” said Sean Simko, a money manager who oversees $10 billion at SEI Investments Co. in Oaks, Pa. “If data comes in more with a stronger bias, you’ll likely see the front end underperform again.”

Treasury five-year note yields rose 25 basis points, or 0.25 percentage point, in March to 1.75 percent as of yesterday in New York, according to Bloomberg Bond Trader prices. Thirty-year bond yields fell three basis points on the month to 3.55 percent and touched 3.49 percent on March 27, the lowest since July 3.

The benchmark 10-year note yield rose seven basis points this month to 2.72 percent. The average the past decade is 3.46 percent.

Monthly, Quarterly

Treasuries handed investors a loss of 0.1 percent in March, based on the Bloomberg U.S. Treasury Bond Index, the first monthly decline since December. That trimmed the gain this year to 1.9 percent, the biggest quarterly advance since April-June 2012.

Investors pulled $10.3 billion in government bonds from U.S. exchange-traded funds in March, the largest monthly exodus since December 2010, data compiled by Bloomberg show.

The gap between the five-year note yield and the 30-year bond, known as the yield curve, narrowed on March 27 to 1.79 percentage points, the least since October 2009.

“People are much more comfortable with curve trades, if they want to have a bias toward the Fed tightening faster than expected,” Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc., said March 27.

A yield curve plots the rates of bonds of different maturities from the same issuer. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously. Longer-term bonds tend to rise or fall based on the outlook for inflation, while shorter maturities are anchored by the Fed’s policy rate.

Futures Bets

Hedge-fund managers and other large speculators increased their net-short position in five-year note futures in the week ending March 25 to the most since January 2009, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 172,119 contracts on the Chicago Board of Trade. Net-short positions rose by 82,399 contracts, or 92 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Speculative long positions on 30-year bonds, or bets prices will rise, outnumbered short positions by 10,550 contracts on the Chicago Board of Trade, the fewest since the period ended Dec. 20. Net-long positions fell by 18,397 contracts, or 64 percent, from a week earlier, the CFTC said.

Inflation Expectation

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for U.S. consumer prices over the life of the debt, was 2.14 percentage points yesterday, below the average over the past decade of 2.21 percentage points.

The Federal Open Market Committee on March 19 predicted their target interest rate will be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast, as they upgraded projections for gains in the labor market. It has been zero to 0.25 percent since 2008.

The U.S. unemployment rate is forecast to drop to 6.6 percent in March from 6.7 percent in February, according to the forecast of economists in a Bloomberg News survey before the report April 4. The lower rate would match the least since October 2008.

The Fed is overhauling forward guidance after unemployment declined toward 6.5 percent, its previous threshold for a rate increase. The central bank dropped a linkage between the benchmark interest rate and a specific level of unemployment, saying its assessment takes into account a “wide range of information,” including labor-market conditions, inflation expectations and financial markets.

‘Higher Rates’

“Fundamentally, we’re going to higher rates,” Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York, said March 27.

Higher Treasury yields have attracted demand. An auction of $29 billion of seven-year notes March 27 at a yield of 2.258 percent, the highest since December, drew the strongest demand from investors that place bids directly with the Treasury since the U.S. resumed selling the maturity in 2009.

The U.S. auctioned $35 billion of five-year notes March 26 at a yield of 1.715 percent and $32 billion of two year notes the day before at 0.469 percent. Both securities were sold at the highest levels since 2011.

The Treasury also sold $13 billion of two-year floating-rate notes on March 26 at a bid-to-cover ratio of 4.67 percent, higher than the 2.9 average of fixed-rate debt sold this year by the government.

G-7 Peers

Treasury 10-year yields climbed to an almost four-year high versus their Group of Seven counterparts as the Fed trims stimulus and the European Central Bank is being encouraged by the Organization for Economic Cooperation to add more. The extra yield 10-year Treasuries offer over their G-7 peers touched 62 basis points on March 19, the highest level since April 2010. The average over the period is negative 13 basis points.

U.S. gross domestic product grew at a 2.6 percent annualized rate from October through December, more than the 2.4 percent gain reported last month, figures from the Commerce Department showed March 27 in Washington.

The economy of the Group of 10 nations is forecast to grow 2.02 percent this year, compared with 2.7 percent for the U.S.

To contact the reporter on this story: Susanne Walker in New York at

To contact the editors responsible for this story: Dave Liedtka at Kenneth Pringle

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