Treasury 10-Year Notes Off to Worst Annual Start in Two Years

Treasuries fell, extending the worst start of a year for benchmark 10-year notes since 2011, as reports suggested the U.S. economic recovery is gaining momentum and the government sold $72 billion in coupon-bearing debt.

Yields on 10-year notes have climbed 24 basis points, or 0.24 percentage point, since December. The yield reached a high for the week of 2.06 percent Feb. 14, a day after the U.S. sold $24 billion of 10-year notes at higher-than-forecast yields. The yield dropped to as low as 1.94 percent on Feb. 11. Treasury will sell $9 billion of 30-year inflation-index debt on Feb. 21.

“The data has been moderately better, which has weighed on the path of Treasuries,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “Still, it’s impossible to ignore the tight range we’ve settled in, and that’s because political uncertainty is immediately ahead, and growth is still fragile.”

Yield the 10-year notes rose five basis points to 2 percent this week, according to Bloomberg Bond Trader data. Thirty-year bond yields rose one basis point to 3.18 percent.

Treasuries extended losses yesterday after reports showed increases in manufacturing in the New York region and consumer confidence. Retail sales in the U.S. rose in January for a third consecutive month, a separate report showed Feb. 13.

Consumer Sentiment

The Federal Reserve Bank of New York’s Empire State index climbed to 10 from minus 7.8 in January, exceeding all forecasts in a Bloomberg survey. It was the highest since May 2012. The University of Michigan index of consumer sentiment advanced to 76.3 in February from 73.8 the prior month.

Retail sales rose 0.1 percent in December, Commerce Department figures showed, matching the median forecast of 80 economists surveyed by Bloomberg.

“The data suggests the recovery, while not in acceleration mode, continues to edge along,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Even with the evidence of economic growth and renewed investor optimism, investors continue to buy U.S. government debt as a refuge against a renewal of turmoil in global financial markets and concern the U.S. recovery may falter.

Adding to demand is concern over potential automatic spending cuts stemming from a 2011 budget agreement scheduled to take effect March 1 that threaten to slow growth even as legislation funding government operations expires on March 27. The cuts, known as sequestration, were first included in an August 2011 deficit-reduction deal designed to be so draconian that it would push Democrats and Republicans to compromise on taxes and spending.

International Demand

“Anytime you get to 2.06, there seem to be decent buying despite the overwhelming bearishness that seems to be confronting the marketplace,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut.

China remained the biggest foreign owner of Treasuries in December after its holdings rose $19.7 billion to $1.2 trillion, according to the Treasury data released yesterday. The holdings of Japan, the second-largest, rose $2.5 billion to $1.12 trillion.

Foreigners bought a net $29.9 billion of Treasuries in December, according to the report, up from $26.4 billion the month before.

Treasuries have lost 0.89 percent this year, according to an index compiled by Bank of America Merrill Lynch. The Standard & Poor’s 500 Index of shares has returned 5.18 percent this year, including reinvested dividends.

Coupon Auctions

The U.S. Treasury sold $16 billion in 30-year bonds on Feb. 14 at a yield of 3.18 percent and $32 billion of three-year notes on Feb. 12 at a yield of 0.411 percent. The 10-year notes yielded 2.046 percent, compared with a forecast of 2.039 percent in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers.

Ten-year yields will climb to 2.33 percent in the fourth quarter, according to analyst estimates compiled by Bloomberg. Should they turn out to be correct, investors who buy the securities today would lose 1.1 percent by the year-end.

“The market is playing ‘wait and see,’ said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “But the market is still more vulnerable to higher yields given the economy.”

The Fed said on Dec. 12 that interest rates will remain near zero “at least as long as” the unemployment rate stays above 6.5 percent and inflation “between one and two years ahead” is projected to be no more than 2.5 percent. Government figures showed this month that the jobless rate was 7.9 percent in January.

‘Considerably Easier’

Fed Bank of St. Louis President James Bullard said central bank stimulus has been ramped up this year with the decision to increase outright bond purchases to $85 billion a month and that a growing balance sheet could be complicated to unwind.

“The current stance of U.S. monetary policy is considerably easier than it was in 2012,” Bullard said in a speech on Feb. 13 in Starkville, Mississippi. “The size of the balance sheet could inhibit” the Fed’s “ability to exit appropriately from the current very expansive monetary policy.”

The Fed is scheduled on Feb. 19 to buy as much as $1.75 billion of Treasuries maturing between February 2036 and February 2043, the Fed Bank of New York’s website showed. U.S. financial markets are closed Feb. 18 for Presidents’ Day.

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