U.S. 10-Year Yields Fall From 1-Year High as Level Spurs Demand

Treasuries rose after 10-year notes suffered the biggest one-day decline since October 2011, as the highest yields in 13 months attracted buyers amid speculation whether the Federal Reserve will reduce asset purchases.

Bonds have tumbled around the world this month with the Bank of America Merrill Lynch Global Broad Market Index down 1.3 percent in May, poised for the steepest loss since April 2004, and Treasuries have dropped 1.9 percent this month, the indexes show. Yields rose yesterday after a report showed U.S. consumer confidence climbed to a five-year high. The U.S. auctioned $35 billion of five-year notes today at a lower-than-forecast yield.

“This is an opportunity to put money to work at levels that are 60 to 70 basis points higher than they were a month ago,” said Thomas di Galoma, senior vice president of fixed-income rates trading at ED&F Man Capital Markets in New York. “The perception is the economy will remain on the weak side, and people don’t want to chase the equity market.”

Treasury 10-year yields fell five basis points, or 0.05 percentage point, to 2.12 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due in May 2023 rose 14/32, or $4.38 per $1,000 face amount, to 96 23/32.

The yield had climbed to 2.23 percent, the highest level since April 5, 2012. Thirty-year bond yields dropped six basis points to 3.27 percent after rising 15 basis points yesterday.

‘Ironically’ Lower

Tapering of Fed bond-buying “might start in September and be done by January,” Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that trade directly with the Fed, said in an interview on Bloomberg Television.

Yields on Treasuries “ironically” could be lower in a year, should the Fed have finished its purchases because the removal of accommodation means “risk assets wind up falling and as they fall, you wind up with significantly lower” yields, Jersey said. Fair value for yields on 10-year notes is 1.9 percent, Jersey said.

Treasury volatility as measured by the Bank of America Merrill Lynch MOVE index rose to 75.51 yesterday, the most since Aug. 16, four weeks before the Fed’s Sept. 13 announcement it would begin buying $40 billion a month in mortgages, the first part of its third round of quantitative easing. The index has averaged 57.1 this year.

Options on interest-rate swaps show projected price swings have risen to the highest since August after trading just above the six-year low reached in April.

The Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index has fallen 1.5 percent this month, the most since January 2009.

Yield Difference

The difference between 10-year and 30-year yields narrowed to 1.13 percentage points, the smallest gap since November. The 10-year note is more tied to mortgages, which have been hit hard during the bond market selloff, said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, a primary dealer.

Trading volume rose to $515.5 billion yesterday, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. It reached $662 billion on May 22, the highest level in data going back to 2004. The average daily volume for this year has been $292 billion.

Trading in Treasury futures reached a record yesterday, according to the CME Group in Chicago. Ten-year note futures trading totaled 4.2 million contracts, five-year futures and options contracts amounted to 3 million and 1.9 million two-year contracts and options were traded, the CME said in a statement.

The 10-day relative-strength index, a gauge of momentum, for the 10-year note, was 72.7 yesterday from 54.9 on May 3. A level below 30 or above 70 suggests the yield may change direction.

Fed Buys

The Fed buys $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on interest rates. The central bank purchased $3.1 billion of Treasuries maturing from August 2020 to February 2023 today.

Chairman Ben S. Bernanke said last week the central bank could cut the pace of its purchases if officials see indications of sustained improvement in economic growth.

The Fed’s bond purchases, a policy of known as quantitative easing, or QE, may not be the most important influence for yields. A JPMorgan Chase & Co. report published in February said its models showed that the end of QE would trigger only about an eight-basis-point rise in 10-year note yields, while the Fed’s plan to keep rates at zero into 2015 is keeping them about 40 basis points below where they’d be otherwise.

Swaps Data

Swaps traders have pushed forward their expectations for the Fed’s first interest-rate increase since adopting extraordinary monetary stimulus to about December 2014 after yesterday’s sell-off in Treasuries. That compares with expectations for May 2015 on May 22, the day Bernanke testified before Congress.

“Crisis-level interest rates are normal only for so long,” said Richard Bryant, a trader at Mizuho Securities USA Inc. in New York, a primary dealer. “At some point, the pension funds and the money managers will come back into the market. Right now they’re being patient and waiting to see how much this move has left in it.”

Fed Bank of Boston President Eric Rosengren said the Fed should press on with record stimulus to speed economic growth, reduce 7.5 percent unemployment and boost inflation running below 2 percent.

“While we have seen some improvement in labor market conditions, significant accommodation remains appropriate at this time,” Rosengren said today in remarks prepared for a speech in Minneapolis. “Core inflation remains at the very low end of recent experience, and the unemployment rate is close to the cyclical peaks of the past two recessions.”

Price Pattern

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.

At today’s auction, the bid-to-cover ratio was 2.79, compared with an average of 2.84 for the previous 10 sales. The yield was 1.045 percent, compared with a forecast of 1.051 percent in a Bloomberg News survey of seven of the Fed’s primary dealers.

Primary dealers bought 32.6 percent of the notes, the least since at least 2003. Indirect bidders, an investor class that includes foreign central banks, purchased 44 percent of the notes, compared with an average of 41.55 percent for the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 23.3 percent of the notes, compared with an average of 15.06 percent at the last 10 auctions.

Auction Review

“Indirects and directs stepped up,” said William O’Donnell, head U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, a primary dealer. After “a weak two-year auction yesterday, it looks like we may have gone back far enough to attract some money into the market.”

The U.S. sold $35 billion of two-year notes yesterday at a yield of 0.281 percent and will auction $29 billion of seven-year securities tomorrow. The auctions, including Treasury Inflation-Protected Securities offered last week, will raise $53.5 billion of new cash, as maturing securities held by the public total $58.5 billion, according to the U.S. Treasury.

Investors have bid $2.99 for each dollar of the $876 billion in Treasury notes and bonds sold at auction so far this year compared with a record bid-to-cover ratio of $3.15 set in 2012.

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