Treasuries Decline Before Fed Meets to Review Rate-Timing Stance
Treasuries fell before the Federal Reserve meets to review its policy stance on the timeframe for an interest-rate increase.
Ten-year yields advanced from their lowest close in 18 months as policy makers consider whether to retain a pledge to keep rates low for a “considerable time” after they ended monthly bond-buying in October. The Fed must weigh the pace of economic growth as a report showed industrial production increased last month by the most since May 2010. Crude oil prices extended declines after the United Arab Emirates said OPEC won’t rein in production in response to the slump.
“People are so focused on how they will change the wording,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp., referring to the Fed. “They are data-dependent so they’ll probably reinforce that story.”
The five-year yield rose six basis points, or 0.06 percentage point, to 1.57 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.5 percent note due November 2019 dropped 9/32, or $2.81 per $1,000 face amount, to 99 21/32.
A measure of volatility rose to the highest level since October. Bank of America Merrill Lynch’s MOVE Index, which gauges price swings in Treasuries based on options, rose to 77.64, the highest since Oct. 24. The 2014 average is 61.7.
China Holdings
China’s holdings of U.S. Treasuries fell to a 20-month low in October, as yuan appreciation of 0.4 percent against the dollar indicated less of an impetus to buy the government securities.
China held $1.25 trillion in U.S. debt as of October, a $13.6 billion drop from September, the Treasury Department said in a monthly report today. The nation remains the largest foreign holder, ahead of Japan, whose stockpile increased $0.6 billion to $1.22 trillion.
Ten-year yields added four basis points to 2.12 percent after closing at 2.08 percent on Dec. 12, the lowest since June 2013. Thirty-year yields rose one basis point to 2.75 percent.
Crude oil futures dropped 4.3 percent to $55.32 a barrel in New York, after reaching the lowest level since May 2009.
Treasuries returned 6.5 percent through Dec., 12, compared with a 9.7 percent gain from German securities, according to Bloomberg World Bond Indexes. Italian bonds earned 14 percent and Spanish debt gained 15 percent.
The difference between the yields on two-year and 30-year debt, known as the yield curve, narrowed to the least in almost six years. It touched 216 basis points, the least since January 2009.
The flatter yield curve, a chart of rates on securities of varying maturities, suggests investors are seeking longer maturities at the expense of shorter-dated notes, judging inflation will stay subdued even as the fed prepares to raise rates.
Fed Policy
The central bank may “leave considerable time in there and tell you that it could be removed in the next couple of meetings, and that they will begin the process of raising rates in May or June,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York.
Fed Chair Janet Yellen and her fellow policy makers will gather in Washington tomorrow for their final two-day meeting of the year. The last time the Fed increased benchmark federal funds rate was in 2006.
Futures prices show a 58 percent chance the Fed will raise it interest-rate target by its September meeting, according to data compiled by Bloomberg.
“The big key is what these lower oil prices mean for the economy and for the Fed, and what’s the Fed going to say about it,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.
Economic Reports
Treasuries also fell as Industrial production surged in November by the most since May 2010, signaling manufacturing is bolstering economic growth.
The 1.3 percent gain in output at factories, mines and utilities followed a 0.1 percent increase the prior month that was previously reported as a decline, figures from the Fed showed. Manufacturing rose 1.1 percent, the most in nine months, and output at utilities was the strongest in almost eight years.
Industrial production “was strong across the board,” Roth of Mitsubishi UFJ said. “It is indicating a very healthy manufacturing economy.”
(An earlier version corrected the maturity in the fourth paragraph.)