Treasury Yields Rise From October Lows as Rally Meets Resistance

  • Bond prices fall after relative strength index suggests shift
  • Manufacturing in U.S. contracted for a fourth month in January

Treasuries fell, lifting 10-year yields from their lowest since October, as traders speculate the rally that pushed U.S. securities to the best start in a year may be overdone.

U.S. bond prices declined after sovereign yields around the world plunged last week following Japan’s decision to adopt negative interest rates. The 14-day relative strength index for Treasury 10-year notes fell as low as 30 last week, according to data compiled by Bloomberg, with a level below 30 or above 70 suggesting the security may be poised for a change in direction. It rose to 34.9 Monday.

"In the short term, we expect rates to move higher from these levels," said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "We’ll need some other catalyst in the form of softer economic data to break yields lower.”

Bonds surged in January as investors sought the safety of fixed-income securities while stocks and oil plunged, undercutting expectations for inflation and economic growth. The Federal Reserve last week left U.S. interest rates unchanged and said it expects to raise them at a gradual pace.

The benchmark Treasury 10-year note yield rose three basis points, or 0.03 percentage point, to 1.95 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.25 percent security due in November 2025 fell 8/32, or $2.50 per $1,000 face amount, to 102 21/32. 

‘Profit-Taking’

Yields on 10-year notes earlier approached an indicator of technical resistance traders see at around the 1.9 percent level, reaching 1.91 percent, the lowest since Oct. 2, before rebounding. In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

"The market has run a long way here," said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of the 22 primary dealers that trade with the Fed. "It’s profit-taking. People are realizing that Japan and the U.S. have different economies and different central-bank policies."

Treasuries briefly pared losses after Fed Vice Chairman Stanley Fischer said policy makers are undecided about their next move as they try to gauge the impact on the U.S. economy from recent turmoil in financial markets and uncertainty over China.

Inflation Gauge

“If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States,” Fischer told the Council on Foreign Relations in New York on Monday. “But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy.”

The Fed’s preferred gauge of inflation climbed to an annual 0.6 percent in December from 0.4 percent the previous month, Commerce Department data showed Monday, in line with the median forecast of economists surveyed by Bloomberg. The central bank targets a 2 percent inflation rate.

Manufacturing in the U.S. shrank in January for a fourth consecutive month as businesses cut staffing plans. The Institute for Supply Management’s index rose to 48.2 last month, after December’s 48 level was the weakest since June 2009.

The market-implied probability the Fed will raise its policy rate at or before its December gathering was 62 percent, down from about 93 percent at the end of last year, according to futures data compiled by Bloomberg. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new target range after the next increase. Policy makers in December projected four interest-rate increases this year.

A report Friday is forecast to show the U.S. unemployment rate is still at the lowest since 2008.

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