Treasuries Drop a Second Quarter Amid Improving EconomySusanne Walker
Treasury 10-year notes fell for a second quarter, the first back-to-back drop in two years, as investors sought higher-yielding assets amid improved economic data and a Federal Reserve pledge to maintain monetary stimulus.
Yields on the benchmark securities reached 11-month highs as the U.S. unemployment rate unexpectedly fell in February and employers added more jobs than forecast. Payrolls also swelled in March, a report in the coming week may show. The rise in yields was tempered as the bailout of Cyprus and Italian political turmoil renewed the haven appeal of U.S. government debt.
“The U.S. economic data was stronger in the first quarter than in the fourth, and it has confirmed the notion that while we are not into a roaring recovery, the U.S. economy seems to be on somewhat better footing,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.
The U.S. 10-year yield increased nine basis points, or 0.09 percentage point, from January through March to 1.85 percent. It touched 2.08 percent on March 8, the highest since April 5, 2012. The yield climbed 12 basis points from October through December. Its last two-quarter rise ended in March 2011.
Ten-year yields fell eight basis points this past week in New York, according to Bloomberg Bond Trader prices.
For the benchmark yield to rise to a Bloomberg survey’s median year-end estimate of 2.25 percent, “we will have to see the employment market improve, the situation in Europe subside and the end of the Fed’s quantitative-easing program become apparent,” Lyngen said.
Treasuries due in a decade or more have been trading at almost the cheapest level in 19 months relative to global peers with comparable maturities, according to Bank of America Merrill Lynch bond indexes. Yields on the Treasuries reached 57 basis points higher than those in an index of other sovereign debt on March 25, the most since August 2011, the data showed. The spread was 54 basis points on March 27.
U.S. government securities underperformed the Standard & Poor’s 500 Index in March as Fed efforts to spur the economy boosted stocks.
Government bonds returned 0.2 percent through March 27, according to a Bank of America Merrill Lynch index, versus a return by the stock index of 3.3 percent including reinvested dividends. The S&P 500 rose to a record on Thursday, March 28, wiping out losses from the financial crisis, and the Dow Jones Industrial Index climbed to its highest ever. U.S. markets were closed on Friday, March 29, for observance of Good Friday.
Treasuries have lost 0.2 percent this year, after returning 2.2 percent in 2012, the Merrill Lynch index showed.
Fed policy makers said March 20 after a meeting the central bank will continue buying bonds under the third round of its quantitative-easing strategy until there’s a substantial improvement in the U.S. labor market. It purchases $85 billion a month of Treasury and mortgage securities to put downward pressure on borrowing costs.
While the jobs market has showed improvement, the unemployment rate “remains elevated,” they said. They reiterated that the Fed would keep its key interest-rate target at virtually zero as long as unemployment remains above 6.5 percent and inflation is projected at no more than 2.5 percent.
Treasury yields had climbed March 8 after the Labor Department reported U.S. nonfarm payrolls increased by 236,000 jobs in February, beating a Bloomberg survey forecast of 165,000, and that the unemployment rate fell to 7.7 percent, from 7.9 percent.
“It’s clear and unambiguous -- the economy’s doing better,” William O’Donnell, head U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said that day. The firm is one of 21 primary dealers that trade with the U.S. central bank. “The Fed’s policy actions are clearly having some impact.”
The U.S. will report April 5 that employers added 195,000 jobs in March and unemployment stayed at 7.7 percent, economists in a Bloomberg survey forecast.
Treasury 10-year yields held at 1.85 percent on March 28 after Commerce Department data showed U.S. gross domestic product rose at a 0.4 percent annual rate in the fourth quarter, up from a 0.1 percent prior estimate.
“We’ll dance around these levels, maybe up to 1.90 percent if Cyprus continues to calm down,” said Steven Ricchiuto, chief economist in New York at the primary dealer Mizuho Securities USA Inc. “After that it’s really up to payrolls.”
Treasuries have gained 0.7 percent since turmoil over a rescue of Cyprus took center stage two weeks ago, Bank of America Merrill Lynch indexes show. The yield on the 10-year note has closed below 2 percent since March 15.
Bonds rose this past week as concern a European Union-led aid package for Cyprus might be a precedent for future rescues fueled bets that instability in the region would increase. The nation is shutting its second-biggest bank, largely wiping out bondholders, to win a 10 billion-euro ($13 billion) bailout. Uninsured bank depositors also face losses.
Cyprus is the fifth nation in the euro bloc to seek international aid since Europe’s crisis began in Greece in 2009.
In Italy, Pier Luigi Bersani, head of the Democratic party, failed to assemble a majority in the divided parliament to form a government following inconclusive elections in February.
“It’s been a pretty bullish week for Treasuries,” said Michael Lorizio, senior trader at Manulife Asset Management in Boston. “The market may be a little bit spooked. Over the last couple of springs we seem to have headline risk from Europe sprout up at about the same time.”
The New York-based Securities Industry and Financial Markets Association recommended that Treasuries trading end at 2 p.m. on Thursday, March 28, and stay closed yesterday, Friday, March 29.