Treasuries in Longest Slide Since August on Tapering SpeculationDaniel Kruger
Treasuries fell for a fourth week, the longest slide since August, after Federal Reserve Chairman Ben S. Bernanke said the central bank may cut the pace of asset purchases if policy makers see indications of sustained growth.
Yields on benchmark 10-year notes climbed to the highest level since March and volatility increased to the most in six months after Bernanke said May 22 that the central bank may reduce its stimulus at some point. The U.S. will sell $99 billion in notes over three days beginning May 28.
“Whether he wanted to elicit this type of reaction by the market, that’s the interpretation by the market,” said Sean Murphy, a trader in New York at Societe Generale SA, one of the 21 primary dealers required to bid at Treasury auctions. “Now they’ll look for data to see whether this is going to be a sped-up process or not. Next week’s supply is going to add more pressure.”
The 10-year note yield rose six basis points, or 0.06 percentage point, to 2.01 percent. The yield rose to 2.07 percent May 23, the highest since March 14. The price of the 1.75 percent note due in May 2023 fell 16/32, or $5 per $1,000 face value, to 97 21/32.
The last time 10-year note yield climbed for four consecutive weeks was in the period ended Aug. 17, when signs of accelerating economic growth dimmed the likelihood the Fed would initiate another round of asset purchases. The central bank ended up increasing its debt purchased to $85 billion a month in September.
Treasury volatility as measured by Bank of America Merrill Lynch’s MOVE index increased to 68.22 May 23, the highest level since Nov. 6. The measure has climbed from a record low 48.87 on May 9 as improving economic data has led some central-bank officials to suggest that the Fed could scale back some of its accommodative policies.
“There’s a big difference between a tightening of policy and a tapering of purchases,” said Thomas Roth, senior Treasury trader at Mitsubishi UFJ Securities USA Inc. in New York. Trading will remain data dependent, “but I think the market can push to higher rates if we do get better numbers,” Roth said.
Orders for durable goods, those meant to last at least three years, increased 3.3 percent last month after dropping 5.9 percent in March, the Commerce Department said yesterday. The median forecast from 78 economists surveyed by Bloomberg projected a 1.5 percent increase.
“If we see continued improvement, and we have confidence that that is going to be sustained, then we could in -- in the next few meetings -- we could take a step down in our pace of purchases,” Bernanke said in testimony to the U.S. Congress on May 22.
Treasuries have handed investors a loss of 1.4 percent this month through yesterday, according to indexes compiled by Bank of America Merrill Lynch. German bunds dropped 1.1 percent. For the year, Treasuries have fallen 0.6 percent through May 23, compared with a 0.2 percent loss for German debt.
Treasury Inflation Protected Securities rose May 23 after non-primary dealers bought about 69 percent of the $13 billion of the 10-year securities issued that day, the most on record, according to data compiled by Bloomberg going back to 2003.
The TIPS offering drew a high yield of minus 0.225 percent, compared with minus 0.602 percent at the March 21 offering, the biggest jump since the January 2011 sale of the maturity. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.52.
The gap in 10-year yields between TIPS and Treasuries not indexed for inflation, known as the break-even rate and which equals the market’s forecast for the average inflation rate for the life of the debt, dropped to 2.23 percent on May 23, the lowest since August, before the Fed increased the amount of its monthly bond purchases.
The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, fell in April for a second month by 0.2 percent, according to the median forecast of 23 economists in a Bloomberg News survey. The Bureau of Economic Analysis will report the data May 31.
“The Fed’s been pretty clear that they’re reaction is going to be economic-data determined,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. If inflation remains low, “the Fed’s going to have a free hand. They’re going to be able to do what they want in terms of QE and asset purchases.”