Treasuries Loss Is Biggest in 3 Years as Fed Considers Tapering

Treasuries recorded the steepest monthly loss since 2009 amid speculation the Federal Reserve could curtail its unprecedented monetary stimulus program if recent improvement in domestic economic data is sustainable.

U.S. government debt tumbled 1.8 percent in the month through May 30, the most since December 2009, according to Bank of America Merrill Lynch index data. Yields extended gains yesterday after a report showed consumer confidence rose in May to the highest level since 2007. A government report on June 7 is forecast to show the U.S. added 165,000 jobs in May and the unemployment rate remained at a four-year low of 7.5 percent.

“This is where the battle is going on now -- it’s all about what the Fed is going to do,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The market’s going to overreact to the economic data that we get over the next couple of months because of that. The Fed is on hold right now and will look at economic data over the summer to decide whether or when to taper.”

The yield on 10-year Treasury notes rose 12 basis points this week, or 0.12 percentage point, to 2.13 percent in New York, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due in May 2023 fell 1 2/32, or $10.63 per $1,000 face amount, to 96 20/32. The yield reached 2.23 percent May 29, the highest level since April 5, 2012.

Thirty-year bond yields climbed 11 basis points to 3.28 percent.

Market Trends

The 10-year yield surged 46 basis points since April 30, the most since jumping 50 basis points in December 2010. It is estimated to end the year at 2.20 percent, according to the median forecast of 75 economists and strategists in a Bloomberg News survey.

“We are in a bear market for Treasuries, but it doesn’t mean we will see rates rise sharply,” said David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors, in a telephone interview May 30. “People are still skeptical about the economy and whether or not it will be strong enough to cause the Fed to actually taper. The economy is probably strong enough that over the balance of this year you’ll see rates rising.”

Yields rose yesterday after 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.

Bond Returns

Treasuries have lost investors 1 percent this year after returning 2.2 percent in 2012. Securities in the Bank of America Merrill Lynch Global Broad Market Index have fallen 1.5 percent in May, poised for the steepest loss since April 2004.

“Everyone realizes there’s some risk that’s been put back into the bond market,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp., in an interview May 30.

Volatility as measured by the Bank of America Merrill Lynch MOVE index rose to 81.22 May 29, the highest level in almost a year. It was at 79.99 yesterday.

Trading volume rose to $631 billion on May 29, 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 $298 billion.

Futures Trade

Trading in Treasury futures reached a record on May 29, according to the CME Group in Chicago. Futures and options trading for 10-year notes totaled 5.9 million contracts and 3.6 million contracts for five-year futures and options, the CME said in a statement.

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.

Volatility in Treasuries has increased as investors speculated on the Fed’s next move. The Fed is buying $85 billion of Treasury and mortgage debt a month to support the economy amid speculation it may taper even as inflation remains contained.

Inflation Watch

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, a government report said yesterday.

The gap between 10-year Treasury yields and similar maturity Treasury Inflation Protected Securities, known as the 10-year break-even rate narrowed to 2.15 percentage points on May 30, the lowest level since July 2012. It rebounded to 2.19 percent yesterday.

Higher yields and historically low inflation levels bolstered demand for Treasuries at the government’s auctions of $99 billion in notes this week. The U.S. sold $35 billion in two-year securities on May 28, an equal amount in five-year debt the next day and $29 billion in seven-year notes on May 30.

“I guess we found the right attractive level, at least for the time being,” said Justin Lederer, an interest-rate strategist at primary dealer Cantor Fitzgerald LP in New York, in a telephone interview May 30.