Treasury Yields at Almost 14-Month Highs Amid Fed Speculation

Treasury yields traded at almost 14-month highs as the heads of the Federal Reserve Banks of Atlanta and San Francisco renewed concern the central bank may end its bond-buying program this year.

Benchmark 10-year notes had rallied earlier after an unexpected decline in U.S. manufacturing in May prompted a paring of bets on a slowing of quantitative easing. Atlanta Fed President Dennis Lockhart said he wouldn’t rule out a reduction of QE in the next few months although today’s ISM data suggest the economy isn’t strong enough to justify a reduction in bond buying. His comments followed remarks from John Williams of the San Francisco Fed that the purchase program may end this year.

“The Lockhart comments provided further negative impetus,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We expect the range to hold between 2.08 to 2.23 percent.”

Yields on 10-year notes dropped one basis point, or 0.01 percentage point, to 2.12 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.75 percent security due in May 2023 gained 2/32 or $0.63 per $1,000 face amount to 96 22/32.

The yield dropped earlier by as much as six basis points. It climbed on May 29 to 2.23 percent, the highest level since April 2012.

Fed View

Volatility as measured by the Bank of America Merrill Lynch MOVE index was at 79.23. The level rose to 81.22 May 29, the highest level in almost a year.

“I’d tend to be a little more cautious, and say maybe August, September or later in the year” would be time to consider slowing purchases, the Fed’s Lockhart said today in a Bloomberg Television interview. “The issue can be on the table in any of those meetings.”

Yields began climbing earlier after the Fed’s Williams, who doesn’t vote on monetary policy this year, told reporters in Stockholm the U.S. central bank may start reducing its bond buying by “this summer” and potentially conclude it by year-end. Williams was one of the first Fed officials to advocate that the Fed buy bonds without setting a limit on the duration or total for such purchases.

“Williams’s comments created a stir because he was seen by some as a dove,” said David Keeble, head of fixed-income strategy at Credit Agricole Corporate & Investment Bank in New York.

The Fed is buying $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on interest rates. The central bank purchased $1.5 billion of Treasuries due between February 2036 and February 2043 today.

Yields Surge

Treasuries are set to extend losses and price swings may intensify as growth allows central banks to withdraw stimulus, the Bank for International Settlements said.

“Yields will go up as the economy recovers,” Stephen Cecchetti, economic adviser and head of the monetary and economic department at the BIS in Basel, Switzerland, told reporters on a conference call on May 31. “The ride to normality will almost surely be bumpy, with yields going through calm and volatile periods.”

Ten-year yields climbed 46 basis points in May, the most since December 2010, amid debate on the Fed’s timing in curtailing the monetary stimulus and stronger-than-forecast economic data.

A Labor Department report on May 3 showed the unemployment rate unexpectedly fell in April to a four-year low of 7.5 percent and U.S. employers added 165,000 jobs, more than projected. Nonfarm payrolls increased by 168,000 jobs in May, economists forecast before a June 7 Labor Department report.

Jobs Watch

“The big event of the week should be payrolls,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Fed. “If this is a strong number, the idea of QE tapering could be sooner than later.”

Sales of new and previously owned homes rose in April and consumer confidence climbed, other data showed.

At the same time, a gauge tracked by the Fed known as the personal consumption expenditure deflator fell by 0.3 percent in April, the biggest drop since December 2008, a government report said May 31.

Treasuries rose earlier after the ISM data showed contraction. The ISM’s factory index fell to a reading of 49, from the prior month’s 50.7, the Tempe, Arizona-based group’s report showed today. Fifty is the dividing line between growth and contraction. The median forecast of 81 economists surveyed by Bloomberg was for an advance to 51.

The gap between 10-year Treasury yields and similar maturity Treasury Inflation Protected Securities, an indicator of traders’ inflation outlook known as the 10-year break-even rate, was 2.19 percentage points today after narrowing to 2.15 percentage points on May 30, the lowest level since July 2012. The average this year is 2.45 percent.

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