Treasuries Trade in Tightest Range in 2 Months Amid Taper Talk

Treasuries traded in the narrowest range in two months as Federal Reserve Bank of New York President William C. Dudley said economic growth will probably quicken in 2014, possibly warranting a reduction in the central bank’s bond purchases.

The benchmark 10-year note yield traded near a one-week low after Dudley, in remarks prepared for a speech in Stamford, Connecticut, reiterated that the Fed may prolong bond purchases if the economy turns out weaker than its forecasts. Investors trimmed wagers the prices of Treasuries will drop, according to a survey by JPMorgan Chase & Co. A Labor Department report July 5 is forecast to show the U.S. added 165,000 jobs.

“All eyes are on Friday’s employment report -- the Fed has continued to reiterate the importance of the labor market,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Removing or tapering quantitative easing is not the same as hiking, and an increase in the target Fed funds rate is a 2015 or 2016 event.”

The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 2.47 percent at 5 p.m. New York time after touching 2.45 percent, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2023 rose 2/32, or 63 cents per $1,000 face value, to 93 23/32. The yield dropped to 2.44 percent on June 28, the lowest level since June 21.

The Treasury 10-year yield traded in a 4.46 basis-point range today, the narrowest since May 9. Even after recent increases, the yield is more than a percentage point below its decade average of 3.56 percent.

The Securities Industry and Financial Markets Association recommends an early close at 2 p.m. New York time tomorrow before the observance of the July 4 holiday in the U.S.

Fed Tapering

“The private sector of the economy should continue to heal, while the amount of fiscal drag will begin to subside,” Dudley said to the Business Council of Fairfield County, reiterating remarks in a June 27 speech in New York. “If labor market conditions and the economy’s growth momentum were to be less favorable than in the FOMC’s outlook -- and this is what has happened in recent years -- I would expect that the asset purchases would continue at a higher pace for longer.”

Policy makers are debating when to dial back accommodation following comments by Chairman Ben S. Bernanke on June 19 that the Fed may end purchases next year if the economy achieves sustainable growth. The central bank has kept its target rate for overnight lending between banks at zero to 0.25 percent since December 2008 to support the economy.

Pimco Redemptions

Bill Gross’s Pimco Total Return Fund, the world’s largest mutual fund, absorbed a record $9.9 billion in net redemptions last month as investors fled bonds in anticipation of the Federal Reserve scaling back its purchases.

Pacific Investment Management Co., the Newport Beach, California-based firm that runs the fund, provided the preliminary estimate to Morningstar Inc., the Chicago-based research firm said today in an e-mailed statement. The withdrawals left the fund with $268 billion in assets at the end of June, Morningstar said.

“The Fed, while they may be interested in tapering, will take some time to start,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Fed. “We’ve gotten to yields where people are more comfortable owning Treasuries. Employment looms -- if we get a really strong number, we will see pressure on rates.”

Fed Buying

The proportion of Treasury net shorts was at 6 percentage points in the week ending yesterday, according to JPMorgan, compared with 18 percentage points in the previous week. The percentage of outright longs, bets the securities will rise, increased to 13 percent from 6 percent, according to the survey, while outright shorts dropped to 19 percent from 24 percent. Neutral bets fell to 68 percent from 70 percent.

The Fed purchased $1.46 billion of Treasuries today maturing between February 2036 and November 2042 as part of its $85 billion quantitative-easing program to buy Treasuries and mortgage-backed securities each month and support the economy by putting downward pressure on borrowing costs.

Fed Governor Jerome Powell will address a Bundesbank reception in New York about financial regulations later today.

Treasury yields remained lower today after a report showed orders placed with U.S. factories rose in May.

The 2.1 percent gain in factory orders followed a revised 1.3 percent advance the prior month, the Commerce Department reported in Washington. The median forecast of 61 economists in a Bloomberg survey called for a 2 percent increase.

U.S. employers added workers last month, a survey showed before the Labor Department data this week, after hiring 175,000 in May.

Volatility, Volume

The Fed is “more likely than not to continue to signal the exit process and the wind down of QE,” said Gene Tannuzzo, a portfolio manager in Minneapolis at Columbia Management Investment Advisers, which oversees $340 billion. “Any rise in yields for the rest of the year will be modest.”

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 10 percent to $276.3 billion, after closing yesterday at $250.9 billion, the least since May 7. June’s average was $446.2 billion.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index closed yesterday at 101.32, the most recent data available. It increased to 110.98 on June 24, the highest since November 2011.

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