Treasury 10-Year Yield Highest Since April 2012 on Confidence

The Treasury 10-year note yield rose to the highest level since April 2012 after a report showed consumer confidence in May reached the strongest in more than five years.

U.S. debt fell before Treasury auctions $35 billion of two-year notes in the first of three note sales this week totaling $99 billion. Government securities have lost 1.3 percent in May, set for the steepest drop since December 2010, according to Bank of America Merrill Lynch indexes. The 10-year yield has risen from 1.93 percent on May 21, the day before Federal Reserve Chairman Ben S. Bernanke said last week the central bank may cut the pace of asset purchases if officials see indications of sustained economic growth.

“After Bernanke’s testimony last week, the FOMC minutes and the strength in the equity market, there’s some caution,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. Consumer confidence “added fuel to the fire,” he said.

Benchmark 10-year yields climbed 10 basis points, or 0.10 percentage point, to 2.11 percent at 10:48 a.m. New York time, according to Bloomberg Bond Trader data. The 1.75 percent note due May 2023 slid 27/32, or $8.44 per $1,000 face amount, to 96 26/32. The yield reached the most since April 6, 2012.

Bond Yields

Thirty-year bonds fell more than one point, with the yield rising eight basis points to 3.25 percent, touching the most since March 12. Trade in U.S. government securities was closed yesterday for a holiday.

Should the 10-year Treasury yield close above 2.086 percent, the high for 2013, it would signal further increases, said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut.

“We get back over that and we have to talk about the highs of last year,” Ader said.

The 10-year yield peaked in 2012 at 2.40 percent on March 20. From there it fell to a record low of 1.379 percent on July 25 as the European sovereign-debt crisis continued to worsen.

The two-year notes scheduled for sale today yielded 0.27 percent in pre-auction trading, up from a rate of 0.233 percent at the previous sale on April 23. The U.S. is due to auction $35 billion of five-year debt tomorrow and $29 billion of seven-year securities on May 30.

Trading Pace

Trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, surged to $662.3 billion on May 22, the day Bernanke said in testimony to Congress that policy makers may cut the pace of bond purchases at the next few meetings if they see signs the economy’s growth is sustainable. That was the highest level in data going back to 2004. The previous high was $621.8 billion in August 2007. ICAP’s average daily volume for this year has been $292.8 billion.

The Fed is buying $85 billion of Treasury and mortgage debt a month, a policy known as quantitative easing, to support the economy by putting downward pressure on borrowing costs. The central bank bought $1.45 billion of Treasuries maturing from February 2036 to May 2043 today.

“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 told lawmakers last week.

Economic Update

The Conference Board’s index rose to 76.2, the strongest since February 2008 and exceeding the highest estimate in a Bloomberg survey of economists, from a revised 69 in April, data from the New York-based private research group showed today. The median forecast called for an increase to 71.2.

The S&P/Case-Shiller index of property values increased 10.9 percent from March 2012, the biggest 12-month gain since April 2006, after advancing 9.4 percent in February, a report showed today in New York. The median projection of 30 economists surveyed by Bloomberg called for a 10.2 percent advance.

“The fact that we broke through 2.085 percent level, which was the high for the year, that brought in a lot of stop-outs and fast-money selling for technical reasons as we pushed through that,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors, referring to the 10-year yield.

Unemployment at 7.5 percent and a 1.1 percent inflation rate are helping keep yields and volatility in check.

Treasury Inflation-Protected Securities show investors anticipate an average increase of 2.28 percent in consumer prices for the next decade, up from 2.23 percent on May 23, which was the least since Aug. 9.

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 32 economists in a Bloomberg News survey. The Bureau of Economic Analysis will report the data May 31.

Bank of America Merrill Lynch’s MOVE Index, which tracks option projections for the pace of swings in Treasuries maturing in two to 30 years, fell to a record 48.87 on May 9. The index rose to as high as 68.2 last week, below the average of 96.6 since 2006.

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