Treasury 10-Year Yields Reach Two-Month High on Fed Speculation

Treasury 10-year note yields reached two-month highs as speculation the Federal Reserve may consider tapering its record bond-purchase program crimped demand for the securities as equities indexes traded at record levels.

U.S. debt erased earlier gains as Fed Bank of Philadelphia President Charles Plosser reiterated his view that the central bank should begin to curtail bond purchases in its quantitative easing program as early as its next meeting. Treasuries had rallied earlier today as yield levels attracted buyers betting subdued inflation will bolster the value of the debt’s fixed payments. Fed policy makers meet on June 18-19.

“What’s been driving the market for the past seven trading days is chatter about the potential for the Fed to taper QE,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “Until we see something concrete with respect to Fed action, we’ll continue to trade in this range. The economic numbers will be the key determinant.”

The U.S. 10-year yield rose five basis points, or 0.05 percentage point, to 1.97 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2023 declined 15/32, or $4.69 per $1,000 face amount, to 97 31/32. The yield fell as much as three basis points before climbing to 1.98 percent, the highest level since March 15. It rose 16 basis points last week.

The Standard & Poor’s 500 Index of stocks gained 1 percent and reached its eighth record in the past nine sessions.

Market Shift

“Stocks are hitting new highs because they believe the economy is getting better,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “It’s diverting money out of the Treasury market.”

The 14-day relative strength index for the 10-year note rose to 71.6, a level that indicates the yield may be poised to change direction. It was at 53 a week earlier.

Yields remained higher even as a report showed the U.S. budget deficit will shrink this fiscal year to $642 billion, the smallest shortfall in five years, according to the nonpartisan Congressional Budget Office. The deficit will shrink to 4 percent of gross domestic product, from 10.1 percent in fiscal 2009.

The CBO reduced its estimate of the likely shortfall, citing stronger-than-expected tax receipts. In February, it had projected a $845 billion deficit for the 2013 fiscal year, which ends Sept. 30. Last year’s deficit was $1.1 trillion.

Monetary Stimulus

Central banks around the world have been buying bonds and cutting interest rates in a bid to boost growth and stave off the risk of deflation.

“Should inflation expectations begin to fall, we might need to take action to defend our inflation goal, but at this point, I do not see inflation or deflation as a serious threat in the near term,” Plosser said today in a speech in Stockholm.

The central bank’s measure of traders’ outlook for inflation from 2018 to 2023, known as the five-year five-year forward break-even rate, was at 2.67 percent as of the most recent figures on May 9. The figure is at almost its 2013 low of 2.64 percent reached April 18. It touched a 2013 high of 2.89 percent on Jan. 29.

Central-bank officials including St. Louis Fed President James Bullard said last month persistent disinflation may require the Fed to provide stimulus beyond $85 billion in monthly bond purchases. The Fed bought $3.3 billion of securities maturing between May 2020 and February 2023 today, according to the New York Fed’s website.

Price Swings

Fed stimulus has also suppressed price swings in government debt. Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries rose to 57.74 basis points after falling May 9 to an all-time low of 48.87 basis points. The measure averaged 62.6 basis points during the past 12 months.

Trading volume was $364 billion after reaching $451 billion on May 10, the highest level since Feb. 1, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The average daily volume for this year is $282 billion.

A gauge of U.S. import prices declined 0.5 percent in April, following a revised 0.2 percent drop from a month earlier, according to Labor Department figures released today in Washington. The decrease matched the median estimate in a Bloomberg survey of economists. The consumer price index, to be released on May 16 and the broadest measure of inflation, fell 0.3 percent last month, the second consecutive drop, according to the survey median.

Treasuries have dropped 1 percent this month as of yesterday, according to Bank of America Merrill Lynch indexes.

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