Treasuries Rise Second Day Amid Waning Bets Fed Will Slow Buying

Treasuries advanced for a second day as some investors dismissed as overblown speculation that the Federal Reserve was about to slow its bond-buying stimulus program aimed at holding down borrowing costs.

Ten-year notes extended gains after climbing the most yesterday in almost four months and rose for the first week since April. The benchmark yields fell from 14-month highs reached this week as investors weighed whether the economy is accelerating enough for the Fed to consider cutting stimulus. Chairman Ben S. Bernanke has said slowing won’t mean an end to easing. The Federal Open Market Committee meets June 18-19.

“The market has found a new range and is content to trade it going into the FOMC meeting next week,” said Michael Lorizio, senior trader at Manulife Asset Management in Boston. “Cooler heads prevailed as far as the pace of the economy and the Fed’s comfort level with where the economy is going.”

U.S. 10-year yields dropped two basis points, or 0.02 percentage point, to 2.13 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. They slid eight basis points yesterday, the most since Feb. 25. The price of the 1.75 percent note due in May 2023 rose 5/32, or $1.56 per $1,000 face amount, to 96 5/8.

The benchmark yield lost four basis points this week. It touched 2.29 percent June 11, the highest since April 2012.

Thirty-year bond yields fell one basis point to 3.31 percent. They climbed to 3.43 percent on June 11, also the highest since April 2012, and decreased three basis points on the week.

Refining Expectations

“The market is in the process of refining Fed policy expectations,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. Investors are curtailing “expectations for the Fed to be more aggressive on the tapering front,” Lyngen said.

Hedge-fund managers and other large investors reversed their bets on 10-year note futures for a fifth straight week, taking a net-short position, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or wagers that prices will fall, on the futures outnumbered long positions by 9,195 contracts on the Chicago Board of Trade for the week ended June 11. Last week, traders were net-long 19,684 contracts.

Foreign Holdings

Foreign holdings of Treasuries fell in April by the most since June 2006, according to the Treasury International Capital report released today in Washington.

Total holdings of U.S. government securities fell by $69.6 billion, or 1.2 percent, to $5.67 trillion.

Foreign official holders, such as central banks and finance ministries, reduced their holdings by $28.5 billion, or 0.7 percent, to $4.06 trillion, while all other overseas investors reduced their positions in the debt by $41.1 billion to $1.61 trillion, the data show.

Bernanke will hold a press conference after policy makers’ two-day meeting next week.

The Fed chief, in testimony to Congress’s Joint Economic Committee on May 22, said the central bank “expects a highly accommodative stance of monetary policy to remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

The central bank will reduce its buying to $65 billion a month at its Oct. 29-30 meeting, according to the median estimate last week in a Bloomberg survey of 59 economists.

Changing Flow

Changing the flow of purchases does not necessarily yield a smaller central-bank balance sheet, Boston Fed President Eric Rosengren said in a May 29 speech. “Even if we were to adjust the rate of monthly purchases, the ultimate size of the Fed’s balance sheet would depend on the point of cessation,” he said.

The Wall Street Journal reported the Fed may push back on expectations of a rate increase.

The central bank through its purchases has increased its assets to $3.4 trillion. It’s currently buying $85 billion of Treasuries and mortgage securities a month, and has kept the target for overnight lending between banks at almost zero since December 2008.

The Fed purchased $1.46 billion of Treasuries today maturing from February 2036 to May 2043. Investors offered $2.7 billion of the securities to the central bank. The Fed has purchases scheduled next week totaling as much as $12.8 billion.

IMF View

The International Monetary Fund sees the central bank maintaining large monthly bond purchases until at least the end of this year and urged policy makers to carefully manage their exit plan to avoid disrupting financial markets.

Unwinding a policy of record-low interest rates and bond-buying will be challenging, the IMF staff wrote in its annual assessment of the U.S. economy. The Washington-based organization cut its American growth forecast for 2014 to 2.7 percent, from 3 percent.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE Index was at 78.45, after rising to 84.75 on June 6 and June 10, the highest level in almost a year. It has averaged 62 over the past 12 months.

Demand fell at Treasury auctions this week of $66 billion of three-, 10- and 30-year debt amid speculation the Federal Reserve may cut back on bond buying.

Investors placed $2.96 of offers for each dollar of debt sold this year at the U.S. government’s $971 billion in auctions of Treasury notes and bonds, compared with a record bid-to-cover ratio of $3.15 in 2012, data compiled by Bloomberg show.

Treasuries lost 1.1 percent this year through yesterday, according to the Bloomberg World Bond Indexes. German bonds declined 0.9 percent, while Japanese government securities returned 0.3 percent.

Ten-year yields will increase to 2.35 percent by Dec. 31, according to the median forecast of 76 analysts surveyed by Bloomberg News. Thirty-year yields will end the year at 3.4 percent, analysts projected.

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