Treasuries in Narrowest Range in 3 Weeks on Fed-Tapering Views

Treasury 10-year note yields traded in the narrowest range in almost three weeks amid speculation about whether the Federal Reserve may start to reduce bond purchases in September.

Benchmark 10-year yields had a weekly drop for the first in three weeks. The U.S. sold $24 billion of the securities on Aug. 7, part of $72 billion in notes and bond sales this week. The central bank has been purchasing $85 billion in Treasuries and mortgages each month in a program known as quantitative easing to put downward pressure on interest rates.

“There’s remarkably little volatility in the Treasury market,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We’ve had very little data of note this week and with no nominal supply until the last week of August, both attendance and participation have fallen off quickly. The Fed will taper in September, that’s the consensus.”

The 10-year note yield fell one basis point, or 0.01 percentage point, to 2.58 percent as of 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The 2.5 percent security due August 2023 rose 3/32 or $0.94 per $1,000 face amount to 99 10/32.

The yield traded in a 3.49 basis-point range, the narrowest since July 22.

The 30-year yield was at 3.63 percent, the lowest since July 31. The yield dropped five basis points this week.

Price Swings

Treasury trading volume was $147 billion, the lowest daily level this year, at ICAP Plc, the largest inter-dealer broker of U.S. government debt. Volume has averaged $314.24 billion a day during 2013.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 75.4. It touched 117.89 on July 5, the highest level since December 2010. The average for 2013 is 67.39.

“You’re waiting for some type of information to give you an inkling into the time frame that the Fed’s looking at,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “They were looking for affirmation that the Fed would be tapering in September. We need a new catalyst from here to generate some movement.”

The Fed will purchase as much as $1.75 billion of securities due between February 2036 and May 2043 on Aug. 12, according to the New York Fed’s website.

The benchmark 10-year yield climbed to a two-year high of 2.75 percent on July 8 from a low this year of 1.61 percent on May 1. Fed Chairman Ben S. Bernanke rattled markets in May and June by outlining a plan to end the central bank’s stimulus program of asset purchases.

Fed View

Fed officials indicated greater willingness this week to begin tapering stimulus.

“I would clearly not rule” out a decision to start dialing back the purchases at the Sept. 17-18 gathering of the Federal Open Market Committee, Chicago Fed President Charles Evans said on Aug. 6. “We’ve seen good improvement in the labor market, there’s no question in my mind about that.”

Cleveland Fed President Sandra Pianalto said on Aug. 7 that “if the labor market remains on the stronger path that it has followed since last fall, then I would be prepared to scale back the monthly pace of asset purchases.”

Dallas Fed President Richard Fisher told Germany’s business paper Handelsblatt in an interview that the Fed may start tapering next month.

Auction Data

Treasury 30-year bonds sold yesterday drew a yield of 3.652 percent. That compared with 3.66 percent at a previous auction of similar-maturity debt on July 11, which was the highest in almost two years.

Indirect bidders, an investor class that includes foreign central banks, purchased 40.2 percent of the bonds, compared with an average of 37.2 percent for the past 10 sales. Primary dealers purchased 42.7 percent, below the 48.5 percent average of the past 10 auctions.

The Treasury will auction five-year inflation-indexed debt on Aug. 22, the day it announces the sizes of two-, five- and seven-year maturities it is scheduled to auction on three consecutive days beginning Aug. 27.

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