Treasury Yields Close to Highest Since April Before Fed

Treasury 10-year note yields traded close to the highest in 10 months on speculation Federal Reserve minutes may provide details on when the central bank plans to start trimming debt purchases.

Benchmark notes fell earlier today as a report showed builders broke ground in January on the most U.S. single-family homes in more than four years and permits for future construction rose, an indication the industry’s momentum carried over into 2013. The difference between Treasury yields for two-and 10-year securities widened to 1.77 percentage points, close to the most since April.

“The Fed minutes is certainly the primary driver,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “We’re looking for the Fed to talk a little bit more about the downsides of their very expansionary monetary policy. The short-term data will take second seat to the Fed.”

The U.S. 10-year yield fell one basis point, or 0.01 percentage point, to 2.02 percent at 1:27 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2023 rose 1/8, or $1.25 per $1,000 face amount, to 99 28/32.

Yield Levels

The yield reached as much as 2.05 percent. It climbed to 2.06 percent on Feb. 14, the highest level since April 10. The two-year yield was little changed at 0.26 percent.

Treasury market volatility, as measured by the Bank of America Merrill Lynch MOVE index, declined to 58.4 yesterday from 59.1 on Feb. 15 and compared with the 59.74 average since the Fed announced $40 billion a month in mortgage purchases.

The 200-day moving average for 10-year yields is leveling out after falling for 18 months, according to Mirae Asset Global Investments Co. The 200-day average of 1.71 percent has been little changed for almost four weeks after it tumbled from its August 2011 level of 3.17 percent.

“There is bearish momentum in the Treasury market,” said Will Tseng, a fixed-income trader in Taipei at Mirae Asset, which oversees $50 billion. “The long-term moving average has changed from a downward trend to flat. It won’t be a big jump, but it will be a slow upward trend” in yields, he said.

Fed Reading

The Fed is scheduled to issue the minutes of its Jan. 29-30 meeting at 2 p.m. in Washington. The U.S. central bank said on Jan. 30 it is committed to buying about $85 billion of government and mortgage securities a month to support growth. Minutes of the Fed’s Dec. 11-12 gathering showed members divided between a mid- or end-of-year finish to bond purchases.

“As long as the data remains sustainable, the possibility is going to become more real” that the central bank removes some accommodation, said Sean Murphy, a trader at Societe General SA in New York, one of the 21 primary dealers that trade with the Fed. “It does have the potential to break out” should the market see the Fed minutes as hawkish.

Treasury 10-year yields have risen about 11 basis points since the minutes from the FOMC Dec. 11-12 meeting, released on Jan. 3, showed a divide among participants on how long the purchases should continue. Those who provided estimates were “approximately evenly divided” between participants who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date.

Fed Buys

The Fed bought $3.3 billion of Treasuries maturing from May 2020 to February 2023 today as part of its outright purchase program to bolster the economy. The Fed Bank of New York said it will test allowing “small broker-dealers” to act as counterparties in sales and purchases of Treasuries for the central bank’s portfolio.

Treasuries handed investors a 1 percent loss this year through yesterday, after a 2.2 percent gain last year, according to Bank of America Merrill Lynch indexes.

Wholesale prices in the U.S. rose in January for the first time in four months, reflecting higher costs for food and pharmaceuticals. The producer-price index climbed 0.2 percent after a 0.3 percent drop in December, the Labor Department reported today in Washington. The median estimate in a Bloomberg survey of 74 economists projected a 0.3 percent increase.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.56 percentage points. The average in the past decade is 2.20 percentage points.

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