U.S. 10-Year Yields Fall as Mortgage Applications Drop
Treasuries climbed, pushing 10-year note yields down the most in more than two weeks, as the Federal Reserve bought $4.03 billion in U.S. debt and sales of previously owned homes unexpectedly declined.
Yields (USGG10YR) reached the highest levels since October yesterday, luring back investors after prices slid for nine straight days, the longest losing streak in almost six years. Investors have been re-evaluating the prospects of further monetary stimulus since Fed policy makers raised their assessment of the economy March 13. Mortgage applications fell amid higher rates, and Fed Chairman Ben S. Bernanke said a rise in oil may hurt growth.
“Weaker home-sales data, a drop in mortgage applications, Fed buying and comments from Bernanke about damage from energy prices and Europe have given Treasuries a reason to rise,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Equally, the market’s inability to sell off further has signaled a halt to the selling momentum as the market is reassessing the severity of the price action.”
Yields on 10-year notes dropped six basis points, or 0.06 percentage point, to 2.30 percent at 5:02 p.m. New York time, according to Bloomberg Bond Trader prices. They fell as much as eight basis points, their biggest intraday decline since March 6. The price of the 2 percent securities due in February 2022 climbed 17/32, or $5.31 per $1,000 face amount, to 97 3/8.
Ten-year yields touched 2.40 percent yesterday, the highest level since Oct. 28. They have gained more than 40 basis points this year.
Thirty-year bond yields declined six basis points today to 3.38 percent and touched 3.37 percent, the lowest in a week.
Bernanke on Energy
Yields reached the lows of the day after Bernanke told the House Committee on Oversight and Government Reform higher energy prices may weaken the U.S. economy by sapping consumer spending. That “would probably slow growth, at least in the short run,” he said. Bernanke also said Europe’s financial and economic situation “remains difficult” even as stresses have eased.
The gap between yields on 10- and 30-year Treasuries, the yield curve, widened to 108.9 basis points after reaching 108.6 basis points yesterday, the least since Jan. 23.
“The short-term inflation risk is more in the five- and 10-year sector, and doesn’t extend out to the 30-year,” CRT’s Lyngen said.
The 14-day relative strength index for 10-year note yields declined to 66.6 today after exceeding 70 for five straight days. A reading above 70 indicates to some traders that a gain in the yields may be hard to sustain.
Taking a Breather
“People are taking a bit of a breather with the Fed buying, and the danger that the Fed could step back in if rates get too high” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 21 primary dealers that trade with the Fed. “We didn’t break the 2.4 percent level, which is important from a technical standpoint.”
While 10-year note yields have climbed from the record low 1.67 percent set Sept. 23, they’re still below the average of 3.87 percent over the past decade. They’ll end the year at 2.54 percent, according to the average estimate in a Bloomberg News survey of banks and securities companies, with the most recent projections given the heaviest weightings.
Yields on the benchmark note were 31 basis points higher than those on 10-year German bunds today after the spread reached 32 basis points on March 19, the widest since July.
Credit-default swaps on Treasuries have dropped to the lowest level in two years. The contracts, which typically decline as investor confidence improves, eased to 31 basis points, the lowest since March 2010, according to data provider CMA. The firm is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
The Fed bought Treasuries today due from April 2018 to February 2020 as part of its program to swap $400 billion of shorter-maturity U.S. debt in its holdings with longer-term securities to cap borrowing costs. It is acquiring U.S. debt every day this week, the longest period of consecutive daily purchases since January.
The central bank upgraded its view of the U.S. economy this month while reiterating a pledge to keep its target lending rate at virtually zero through at least late 2014.
“The market has finished discounting the Fed outlook for now, and intense selling has been replaced with moderate inflows of cash,” Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients.
A measure of traders’ expectations for inflation that’s tracked by the Fed has risen this year to 2.76 percent, the highest level since September, as of March 16. The five-year, five-year forward break-even rate, which projects annualized price increases over a five-year period starting in 2017, matches the 2.76 percent average over the past decade.
Forward markets for overnight index swaps, whose rates show what traders expect the federal-funds effective rate to average over the life of the contract, signal a quarter-percentage point advance around September 2013 from the current effective rate of 0.15 percent, according to data compiled by Bloomberg. Last month, such an increase in the effective rate wasn’t predicted until early 2014.
The difference in yield between 10-year Treasury Inflation Protected Securities (USGGBE10) and nominal notes, known as the break-even rate, shrank for the first time in 11 days, decreasing four basis points to 2.40 percent, from 2.44 percent yesterday. The figure indicates the annual rise in consumer prices investors expect over the next 10 years. The average over the past year is 2.19 percent.
The U.S. will sell $13 billion of 10-year TIPS at an auction tomorrow.
Treasuries extended gains today after a report from the National Association of Realtors showed U.S. purchases of existing homes declined 0.9 percent last month to a 4.59 million annual pace, compared with a Bloomberg survey projection of a 0.9 percent rise to 4.61 million. January’s revised total was 4.63 million, the highest since May 2010.
Volatility fell today after climbing yesterday to the highest level this year. Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options, declined to 89.5 basis points, after reaching 93.3 basis points yesterday, the most since Dec. 29. It fell to 69.9 basis points on March 12, the lowest since July 2007.
Mortgage applications in the U.S. dropped last week, reflecting the biggest slump in refinancing since November. The Mortgage Bankers (MBAVBASC) Association’s index declined 7.4 percent in the period ended March 16 from the prior week, the Washington-based trade group reported today. The refinance index decreased 9.3 percent, while the purchases gauge fell 1 percent.
Refinancing of mortgages slowed as borrowing costs rose. The average rate on a 30-year, fixed-rate loan was 4.19 percent, the highest since late November.
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