Treasury Yields Drop From Almost 2-Year High on Syria, Fed Plans

Treasury 10-year note yields fell from close to the highest level in two years after Secretary of State John Kerry said the president will hold Syria’s government accountable for the “moral obscenity” of using chemical weapons.

Yields dropped for the third straight day as a report showing orders for U.S. durable goods declined more than forecast last month, reduced bets the Federal Reserve will being dialing back its bond-purchase program. The U.S. is scheduled to sell $98 billion in two-, five- and seven-year securities this week.

“There are concerns about potential Middle East issues escalating,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the U.S. central bank. “Treasuries are doing better on Kerry’s statement.”

The U.S. 10-year yield fell three basis points, or 0.03 percentage point, to 2.79 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.5 percent note due in August 2023 rose 1/4, or $2.50 per $1,000 face amount, to 97 17/32.

The yield touched 2.78 percent, the lowest level since Aug. 16, after climbing on Aug. 22 to 2.93 percent, the highest since July 2011.

Kerry said the evidence is “undeniable” that chemical weapons were used against residents of a Damascus suburb last week and that President Bashar al-Assad’s regime has the toxic weapons and the capability to deploy them. Suggestions that reports of the attack were fabricated are groundless, he said.

Trading Volume

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 44.5 percent to $186 billion today, from $335 billion on Aug. 23. The figure is down from a 2013 high of $662 billion reached on May 22 and up from a low of $148 billion on Aug. 9. The 2013 average is $314 billion.

Treasuries have tumbled 3.6 percent this year, including 1.1 percent during August, according to the Bloomberg U.S. Treasury Bond Index. Ten-year yields dropped for three consecutive trading sessions, the longest stretch of declines since Aug. 9.

U.S. 10-year securities yielded 31 basis points more than bonds in an index of Group of Seven debt. The securities yielded 42 basis points more on Aug. 21, the most since May 2010, according to data compiled by Bloomberg based on closing prices.

Gradual Decrease

The U.S. government is scheduled to sell $34 billion of two-year notes tomorrow, $35 billion of five-year securities the following day and $29 billion of seven-year debt on Aug. 29.

The Treasury Department is cutting the size of 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 department 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.

As the U.S. bond market suffers its worst rout since 2009, the gauge that historically signals more pain for fixed-income investors is instead suggesting yields are near their peak.

Yield Curve

The gap between two- and 10-year yields widened to 2.55 percentage points this month, double the median of 1.23 points since 1990 and approaching the record 2.93 points in February 2010, data compiled by Bloomberg show. The yield curve is steepening at the fastest pace since 2009 as the Fed signals its intent to keep the target interest rate for overnight loans between banks at about zero into 2015 while reducing the bond-buying economic stimulus that drove 10-year yields to the highest level in more than two years.

While the yield curve typically steepens when faster growth leads investors to demand more insulation from inflation, bond strategists say this time is different. After rising from this year’s low of 1.61 percent on May 1 to 2.93 percent last week, the increase in 10-year yields will slow, with rates reaching 3.05 percent in the second quarter of next year, according to 63 economists in a Bloomberg News survey. Losses will be limited by an economy growing at half the post-World War II average and an inflation rate below the Fed’s 2 percent target, they say.

Durable Goods

Bookings for U.S. goods meant to last at least three years decreased 7.3 percent, the most since August 2012, after a 3.9 percent gain in June, the Commerce Department said today in Washington. The median forecast of economists surveyed by Bloomberg called for a 4 percent drop. Orders waned for aircraft and capital goods such as computers and electrical equipment.

“It puts the Fed on notification -- are they getting ahead of a growing marketplace, or are they reading more into very good numbers, but not sustainable numbers?” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “We could chug along back to 2.72 percent. It may be a good buying opportunity if the Fed blinks at the September meeting.”

The Fed’s debate about 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. It purchased $1.5 billion in Treasuries maturing between February 2036 and February 2043 today.

Primary dealers, those companies that underwrite the U.S. debt, predict the central bank will reduce the pace of its asset purchases in September by $15 billion, to $70 billion a month, a July survey showed.