Treasuries Fall After S&P Boosts U.S. Outlook to Stable
Treasuries fell, pushing 30-year (USGG30YR) bond yields to the highest in more than a year, after Standard & Poor’s boosted its outlook for the U.S. to stable from negative, adding to bets the Federal Reserve may slow monetary stimulus.
Central-bank policy makers meet next week. Treasuries slid last week as data showed U.S. payrolls rose while the jobless rate increased. Fed Bank of St. Louis President James Bullard said inflation below the central bank’s target warrants keeping up $85 billion in monthly bond buying even as the labor market improves. The government will sell $66 billion in notes and bonds this week.
S&P’s statement “is a positive outlook on the economy, and it helps stocks and hurts bonds a little,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The risk for the market is there’s tons of structural longs that have been riding the Fed coattails. That’s been a good trade, and I think it’s coming to an end.” A long position is a bet an asset will increase in value.
The 30-year yield increased four basis points, or 0.04 percentage point, to 3.37 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 3.38 percent, the highest since April 4, 2012. The price of the 2.875 percent security due in May 2043 dropped 5/8, or $6.25 per $1,000 face amount, to 90 23/32.
Yields on benchmark 10-year notes added four basis points to 2.21 percent. They touched 2.23 percent, almost the highest since April 2012.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index increased to 84.75 today, matching June 6’s level, the highest in almost a year. It has averaged 62.4 over the past 12 months.
Trading volume handled by ICAP Plc, the largest inter-dealer broker of U.S. government debt, fell 23 percent to $358 billion, from $464 billion on June 7. Volume surged to $662 billion on May 22, the highest level in data going back to 2004, according to ICAP. The average daily volume over the past year is $265 billion.
Treasuries declined after S&P said in a statement the U.S. has a less than one-in-three likelihood of a downgrade of its AA+ credit rating in the “near term” with the revision. The New York-based company said it sees “tentative improvements,” such as the deal U.S. lawmakers reached to resolve what became known as the fiscal cliff.
S&P cut the U.S. ranking from AAA in August 2011, citing the government’s lack of a plan to rein in its debt load and weakening “effectiveness, stability, and predictability of American policy making and political institutions.” Treasuries rallied as investors sought the safest and most liquid securities. The 10-year (USGG10YR) yield plunged to 2.06 percent from 2.56 percent in the two weeks after the move.
Treasuries fell for the past six weeks, their longest run of weekly losses since May 2009, amid speculation the central bank will taper its bond buying. Yields have risen from 1.61 percent on May 1, the lowest this year.
The Fed is purchasing $45 billion of Treasuries and $40 billion of mortgage securities each month to put downward pressure on borrowing costs in its third round of quantitative-easing stimulus since 2008. It bought $1.38 billion of Treasury Inflation Protected Securities today maturing from February 2041 to February 2043.
The central bank will reduce its purchases to $65 billion a month at its October meeting, according to the median estimate in a Bloomberg survey of economists last week.
The U.S. is scheduled to auction $32 billion in three-year debt tomorrow, $21 billion in 10-year notes the next day and $13 billion in 30-year bonds on June 13.
Demand for Treasuries at auction has slackened amid signs of improvement with the U.S. economy. Investors have bid $2.98 for each dollar of debt sold at the U.S. government’s $905 billion in Treasury notes and bonds sold at auction this year compared with of $3.15 set in 2012, according to Treasury data compiled by Bloomberg.
The measure of demand, known as the bid-to-cover ratio, is still the fourth-highest since at least 1994, following a 3.04 ratio in 2011 and a 2.99 ratio in 2010. It was 2.50 in 2009.
The Fed’s Bullard said U.S. inflation “has surprised to the downside.” Price gains as measured by the personal consumption expenditures price index rose 0.7 percent in April from a year earlier, below the central bank’s 2 percent goal.
While “labor market conditions have improved since last summer,” Bullard said in remarks prepared for a panel discussion in Montreal, “surprisingly low inflation readings may mean the committee can maintain its aggressive program over a longer time frame.”
The yield difference between 10-year inflation-linked Treasuries and comparable non-indexed notes showed investors have cut their expectations for consumer price increases to the lowest level since July. The gap, known as the 10-year break-even rate, touched 2.1 percentage points. It reached 2.08 percentage points on June 6.
San Francisco Fed President John Williams said last week a “modest adjustment downward” in the buying is possible as “early as this summer.” Atlanta Fed President Dennis Lockhart said “very mixed” economic data makes him “more cautious” about a near-term reduction in purchases.
The FOMC said May 1 it will continue buying bonds “until the outlook for the labor market has improved substantially.”
U.S. employers boosted payrolls by 175,000 jobs in May after a revised 149,000 gain in April, the Labor Department said June 7. A Bloomberg survey forecast an increase of 163,000. The jobless rate rose to 7.6 percent, from a four-year low of 7.5 percent.
“It’s not about whether the Fed will taper; it is about when and how much, and that’s what the market will be analyzing,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “We’ll have a bit of a price discovery as we go into supply.”
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