U.S. 10-Year Yield at Almost 2-Week High on Fed-Tapering Views

Treasury 10-year yields rose to almost the highest level in more than two weeks before the Federal Reserve’s statement tomorrow updating the outlook for possible tapering of its $85 billion a month of bond-buying.

Benchmark 10-year notes erased earlier gains, extending a third monthly loss, as the central bank meets today and tomorrow. Fed Chairman Ben S. Bernanke has said monetary stimulus could be reduced if policy makers are convinced that economic growth is sustainable. A report tomorrow is forecast to show gross domestic product growth slowed last quarter.

“The Treasury market is focused on the Fed as their taper talk has been the main driver of these higher rates,,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “The market is trading relatively thin because of the loads of data and the Fed that we will be dealing with this week. People want to get that out of the way before they settle on a market direction.”

The benchmark U.S. 10-year rose one basis point, or 0.01 percentage point, to 2.61 percent at 5:05 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2023 traded at 92 19/32. The yield has climbed 12 basis points this month.

The 10-year yield reached 2.63 percent on July 25, the most since July 10. The high for the year is 2.75 percent on July 8.

Debt Returns

Treasuries have lost 0.2 percent this month and 2.6 percent in 2013, according to Bloomberg World Bond Indexes. German bonds returned 0.5 percent for the month while declining 1.3 percent for the year. U.K. gilts have risen 0.7 percent in July, with a 2.8 percent loss since the end of 2012, the indexes show.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was $207.7 billion, below this month’s average of $270.7 billion.

The Treasury Department said yesterday it will borrow about 6.3 percent less than it projected three months ago as a stronger economy and job growth help narrow the nation’s budget deficit. The estimates are made as part of the department’s quarterly refunding announcement set for tomorrow.

The U.S. posted the widest monthly budget surplus in more than five years in June, as spending plunged 47 percent and a stronger economy lifted tax receipts, the Treasury said July 11. The Obama administration projects the federal budget deficit will shrink to $759 billion in the year ending Sept. 30, the smallest gap in five years.

Debt Sales

The government, which has sold $32 billion of three-year notes each month since October 2010, may reduce August’s offering to $30 billion, Thomas Simons, an economist in New York at Jefferies LLC, said in an e-mail. That would be followed by as much as $2 billion less in sales of two- and five-year notes later that month, he said.

“There is no doubting the reality that government finances have clearly turned a corner,” said Gennadiy Goldberg, a U.S. strategist at Toronto-Dominion Bank’s TD Securities unit in New York, said in a note to clients. “While the size of the refunding auctions may not be reduced, Treasury is likely to telegraph lower issuance needs are looming. It is only a matter of time.”

The Treasury may also give more guidance on the issuance on floating rate notes, which they may sell as early as the fourth quarter this year. The floating-rate notes would be the first added U.S. government debt security since the Treasury Inflation-Protected Securities, known as TIPS, were introduced in 1997.

Economic Update

The Conference Board’s index of U.S. consumer confidence decreased to 80.3 in July from 82.1 a month earlier, data from the New York-based private research group showed today. The median projection in a Bloomberg survey called for a reading of 81.3. Estimates of the 75 economists ranged from 77 to 85.5.

The Commerce Department will say tomorrow that U.S. economic output slowed to an annualized pace of 1 percent in the period from April to June from a 1.8 percent pace the previous three months, according to the median forecast of 83 economists in a Bloomberg News survey.

“It’s really data dependent,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “Some people are backing off” from optimistic reads on growth in GDP and jobs creation.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index rose to 83.27 basis points, up from 72.62 on July 22, the least since May 24. The gauge rose to 117.89 on July 5, the highest since December 2010.

The central bank bought $1.46 billion of Treasuries maturing from February 2036 to November 2042 today, according to the website of the Fed Bank of New York.

“It’s a modest in-range bid ahead of tomorrow’s more relevant fundamental developments,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

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