Treasuries in Longest 2013 Losing Streak as Fed May Trim Policy

Treasuries fell in the longest losing streak this year as the economy showed more signs of strength, prompting speculation the Federal Reserve may start to slow the pace of its monetary stimulus.

Benchmark 10-year yields reached a two-month high as a measure of consumer confidence in May reached an almost six-year high, while the pace of consumer prices remained below the central bank’s 2 percent target. Fed Bank of San Francisco President John Williams said May 16 that the central bank may begin to slow bond purchases as early as this summer. The difference between yields on 10-year notes and similar-maturity inflation-indexed debt shrank to the lowest level since August before a $13 billion sale of Treasury Inflation-Protected Securities on May 23.

“We keep on getting this modestly better data,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Fed. “The continued talk of tapering by Fed speakers is weighing on the market.”

U.S. 10-year yields rose five basis points this week, or 0.05 percentage point, to 1.95 percent, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due in May 2023 fell 15/32, or $4.69 per $1,000 face amount, to 98 6/32.

Ten-year yields have risen for three consecutive weeks, from 1.66 percent on April 26, in the longest stretch of increases since December. The yield reached 1.98 percent on May 15, the highest since March 15.

Futures Positions

Investors reversed to a net-short position from a net-long position in 10-year note futures in the week ended May 14, the first time in a net-short position since March 22, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 11,153 contracts on the Chicago Board of Trade. Last week, traders were net-long 37,956 contracts.

The Standard & Poor’s 500 Index of stocks climbed 2.1 percent to a record 1,667.47.

“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.”

Inflation Measure

The difference between yields on 10-year notes and similar-maturity inflation-indexed debt shrank to 2.23 percentage points, the lowest level since August, indicating reduced concern about rising prices.

TIPS handed investors a loss of 1.9 percent in May through May 16, already making this month the worst since December 2009, according to Bank of America Merrill Lynch indexes. Treasuries overall have declined 0.7 percent.

The consumer price index decreased 0.4 percent, the biggest decline since December 2008, after falling 0.2 percent in March, the Labor Department said May 16. Economists surveyed by Bloomberg projected a 0.3 percent drop, according to the median estimate.

Fed Bank of Boston President Eric Rosengren said inflation that has “persistently” stayed below the Fed’s goal is a concern and may suggest policy hasn’t done enough to support growth.

Fed View

“The longer we in the U.S. remain so far below our 2 percent target, the greater the risk that inflation expectations could fall and real interest rates rise,” Rosengren said in prepared remarks delivered in Milan May 16.

The central bank said after a policy meeting on May 1 it will maintain stimulus as long as the outlook for inflation doesn’t exceed 2.5 percent and as unemployment remains above 6.5 percent.

“The Fed is going to continue its public debate about when to taper, without actually tapering,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA Inc., a primary dealer.

Issuance of Treasury notes, bonds and TIPS may plunge if the Congressional Budget Office’s estimate of smaller federal deficits proves accurate, wrote Michael Schumacher, head of global rates strategy at UBS AG, a primary dealer, in a report dated May 16. Net issuance totaled $667 billion between Oct. 1 and April 30, exceeding the CBO’s predicted budget deficit with five months remaining in the fiscal year, he wrote.

Fiscal Position

A report May 14 showed the U.S. budget deficit will shrink this fiscal year to $642 billion, the smallest shortfall in five years, according to the nonpartisan CBO. The agency reduced its estimate of the likely deficit, 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.

Net issuance was $364 billion in the first four months of calendar 2013, suggesting that Treasury needs another $176 billion of net issuance this year, the UBS strategist said, noting that amounts to a 21 percent decrease in gross issuance.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 83.7 in May, the highest since July 2007, from 76.4 the prior month, a report yesterday showed. The median forecast in a Bloomberg survey was for a gain to 77.9.

Existing home sale increased 1.2 percent in April after a 0.6 percent decline the previous month, according to the median estimate in a Bloomberg News survey of economists before a May 22 report from the National Association of Realtors. The Fed will release minutes of the April 30 to May 1 policy makers meeting on the same day.

The direction of yields “is going to be dependent on the Fed speak,” said Elaine Stokes, a money manager who helps oversee the $23.5 billion, Boston-based Loomis Sayles Bond Fund.

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