Treasuries Drop as Economic Data Add to Fed-Tapering Speculation

Treasury 10-year yields rose, touching the biggest monthly gain since December 2010, as an increase in consumer confidence bolstered speculation the Federal Reserve may trim its bond-buying program with the economy strengthening.

Treasuries pared losses after bankers advising the Fed said “it is likely that current policy accommodation will continue for one to three years,” according to minutes of the central bank’s May 17 meeting released today in Washington. Pacific Investment Management Co.’s Bill Gross, the manager of the world’s biggest bond fund, said he likes five- to 10-year Treasuries and there will be “no tapering for now.”

“This is actually saying the economy is expanding,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “It puts the Fed in check. They are not sure what to do. Views are all over the place, legitimately.”

Treasury 10-year yields rose two basis points, or 0.02 percentage point, to 2.13 percent at 5:01 p.m. New York time, according to Bloomberg Bond Trader data. The 1.75 percent note due in May 2023 dropped 5/32 or $1.88 per $1,000 face amount, to 96 20/32. The yield reached as high as 2.21 percent.

Yield Increase

The yield gained 46 basis points since April 30, the most since jumping 50 basis points in December 2010. U.S. government debt securities of all maturities fell 1.8 percent in May as of yesterday, headed for the steepest monthly loss in three years, according to Bank of America Merrill Lynch indexes.

“We’re on edge,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The market has backed up accordingly and we’re probably going to reside here as we take a look at next week’s data.”

Hedge-fund managers and other large speculators increased their net-short position in 30-year bond futures in the week ending May 28, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 27,251 contracts on the Chicago Board of Trade, up from 9,583 contracts a week earlier.

Investors reversed to a net-short position in 10-year note futures of 35,505 contracts, the data show.

Gross Tweets

Pimco’s Gross, manager of the world’s biggest fixed-income fund, said the federal funds rate will remain at 0.25 percent for a “long time.” He made his comments in a Twitter post.

Gross’s Pimco Total Return Fund, declined 1.9 percent this month, the biggest monthly loss since September 2008. The performance of the $293 billion Total Return Fund puts it behind 94 percent of similarly managed funds through May 30, according to data compiled by Bloomberg. The fund’s allocation to Treasuries has hindered performance as government-debt securities dropped in May.

Fed Chairman Ben S. Bernanke said last week the central bank could curtail monetary stimulus if policy makers see signs of sustained improvement in economic growth.

That prompted a selloff that pushed 10-year yields to 2.23 percent on May 29, the highest level since April 5, 2012. Policy makers meet next on June 18-19.

The Fed has been buying $85 billion of Treasury and mortgage debt a month to support the economy. The central bank purchased $5 billion of securities maturing between May 2017 and February

2018 today, according to the New York Fed’s website.

Banker Views

“Interest rate increases could damage the current momentum” in housing, which is “slowly recovering” amid a rebound in prices related to low inventories, bankers advising the Fed said in minutes. While low interest rates have made home ownership more attractive to some, the panel warned record Fed stimulus may be “perceived as integral” to housing finance.

Treasury’s $35 billion sale of two-year debt on May 28 attracted the fewest bids for the securities since February 2011. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.04, compared with an average of 3.72 for the past 10 sales.

The sale of an equal amount in five-year notes the next day attracted the most interest from non-primary dealer investors since at least 2003. Indirect and direct bidders combined to win about 67 percent of the offering, compared with an average of about 57 percent at the 10 previous auctions. The notes were sold at what is known as a high yield of 1.045 percent, the most for the security at an auction since October 2011.

The seven-year notes sold May 30 attracted the most interest from non-primary dealer investors since December as yields at 1.496 percent, the highest level at an auction in more than a year, bolstered demand. Indirect and direct bidders combined to win about 61 percent of the offering, compared with an average of about 56 percent at the 10 previous auctions.

Economic Path

The Thomson Reuters/University of Michigan final index of sentiment increased to 84.5 in May, the strongest since July 2007, from 76.4 a month earlier. The median forecast in a Bloomberg survey called for the gauge to hold at its preliminary reading of 83.7.

Treasuries earlier rose as a report showed inflation dropped by the most in more than four years. A gauge tracked by the Fed known as the personal consumption expenditure, or PCE, fell by 0.3 percent last month, the biggest drop since December 2008.

The gap between 10-year yields on inflation-indexed securities was close to the lowest level in 10 months.

The difference between 10-year Treasury yields and similar maturity Treasury Inflation Protected Securities, known as the 10-year break-even rate, was at 2.19 percentage points, close to the 2.15 percentage points reached yesterday, the lowest level since July 2012.

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