Treasury Yields Touch Two-Year High on Tapering OutlookCordell Eddings and Susanne Walker
Treasury yields touched two-year highs as the U.S. employment market strengthened and minutes of the Federal Reserve’s last meeting showed policy makers supported slowing the pace of asset purchases this year.
U.S. government securities pared losses yesterday, leaving yields little changed on the week, as a drop in new home sales in July reminded investors the economic expansion remains uncertain. Treasuries due in 10 years and longer have performed the worst in the Group of Seven this month. The Treasury is scheduled to auction $98 billion of notes next week.
“The Fed seems more disposed to tapering than the market originally thought, and the economy is getting better, which means higher yield for now,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “Yields will remain elevated, but we should hover near these levels as value hunters will come in until we get more data that confirms the strengthening economy.”
The U.S. 10-year yield fell one basis point, or 0.01 percentage point, on the week at 2.82 percent in New York, according to Bloomberg Bond Trader prices. The 2.5 percent note due in August 2023 rose 3/32, or 94 cents per $1,000 face value, to 97 8/32. The yield climbed to 2.93 percent on Aug. 22, the highest since July 2011. It is still below its average of 3.54 percent in the past decade.
The minutes released Aug. 21 showed Fed officials supported Chairman Ben S. Bernanke’s plan to start reducing stimulus under quantitative easing later this year if the economy improves, with a few saying it might be needed soon. U.S.-registered bond funds lost $30.3 billion in August, a private report said.
“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” according to the record of the Federal Open Market Committee’s July 30-31 policy session.
“It does appear the markets are continuing to expect tapering,” said James Camp, managing director of fixed income in St. Petersburg, Florida, at Eagle Asset Management Inc., which oversees $27.8 billion. “The Fed wants out of QE. In the near-term we see a 3 percent handle,” or yield of 3 percent on the 10-year note, he said.
The number of jobless claims in the month ended Aug. 17 declined to 330,500 a week on average, the least since November 2007, a Labor Department report showed on Aug. 22. Compared with a week earlier, claims rose by 13,000 to 336,000, in line with the median forecast of 48 economists surveyed by Bloomberg.
Sales of newly built homes declined 13.4 percent to a 394,000 annualized pace, the weakest since October, following a 455,000 rate in the prior period that was lower than previously estimated, Commerce Department figures showed yesterday. The median estimate of 74 economists surveyed by Bloomberg called for a decrease to 487,000. Last month’s decline was the biggest since May 2010.
A jump in borrowing costs over the past three months may be prompting buyers to hold back, showing the difficult job ahead for Fed officials as they try to wean the economy from monetary stimulus while sustaining growth. The average rate on a 30-year, fixed-rate purchase loan was 4.58 percent in the week ended Aug. 22, the highest in two years, according to McLean, Virginia-based Freddie Mac. The 30-year rate was at 3.35 percent in early May compared with a record-low 3.31 percent in November.
The extra yield 10-year Treasuries offer over two-year notes, known as the yield curve, expanded to as much as 2.55 percentage points on Aug. 22 the most since July 2011.
U.S. securities due in 10 years and longer tumbled 3.7 percent this month through Aug. 22, the biggest decline among G-7 nations, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies.
The Fed’s debate over when to taper $85 billion in monthly bond buying has roiled financial markets around the world and sparked a selloff in fixed-income assets. The central bank is buying $45 billion of Treasuries and $40 billion in mortgage bonds each month. U.S. policy makers next meet on Sept. 17-18.
“Economic growth is continuing at a moderate pace,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed-income assets. “We’ve pretty much priced in the effects of the Fed slowing down bond buying later this year.”
The U.S. central bank has kept its target for overnight lending between banks at almost zero since December 2008.
The U.S. government is scheduled to sell $34 billion of two-year notes on Aug. 27, $35 billion of five-year securities the following day and $29 billion of seven-year debt on Aug. 29.
The U.S. is cutting the two-year auction by $1 billion, the first reduction after selling $35 billion of the securities each month since October 2010. The five- and seven-year auctions have been unchanged since 2010.
The Treasury said on July 31 it expects to gradually decrease coupon auction sizes during the coming quarter as the nation’s fiscal health improves. The federal budget deficit for July was $97.6 billion, bringing the total for fiscal 2013, which ends Sept. 30, to $607.4 billion. It was the lowest figure for that stage of a fiscal year since 2008.
The Treasury sold $16 billion in five-year inflation-indexed securities on Aug. 22 at a yield of negative 0.127 percent, the highest since April, 2010, with investors wary of paying a premium to guard against the threat of rising consumer prices.
“Investors are even less worried about inflation as we get closer to tapering, because there will be less money in the system,” said George Goncalves, the head of interest-rate strategy at Nomura Holdings Inc., one of the 21 primary dealers obligated to bid at government auctions.
Primary dealers, those companies that underwrite the U.S. debt, predict the Fed will reduce the pace of its asset purchases in September by $15 billion, to $70 billion a month, a July survey released this week showed.
Investors bid $2.89 for each dollar of the $1.345 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.