Treasuries Drop in Longest Stretch of Losses in 2 Years on Fed

Treasuries declined for a fourth straight month, the longest losing streak in more than two years, as signs the U.S. economy is recovering backed the case for the Federal Reserve to reduce monetary stimulus.

Benchmark 10-year note yields fell this week amid speculation possible U.S. military action against Syria may spur refuge demand. President Barack Obama said Syria’s use of chemical weapons is a direct threat to U.S. and global security. He said he hasn’t made a final decision on his response while “in no event” will it involve U.S. troops on the ground in Syria. A report Sept. 6 is forecast to show U.S. nonfarm payrolls rose this month. The Fed announced its September schedule to buy as much as $45 billion in Treasuries.

“We are chopping around because of uncertainty on Syria and retaliation,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed. “A lot will hinge on the next payroll report. The Fed may taper if the number comes in around plus 200,000.”

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.78 percent at 4:59 p.m. in New York, having increased 21 basis points this month, according to Bloomberg Bond Trader data. The price of the 2.5 percent benchmark note maturing in August 2023 fell 6/32, or $1.88 per $1,000 face amount, to 97 17/32.

The 30-year bond yield dropped two basis points to 3.7 percent.

U.S. financial markets will be shut Sept. 2 for Labor Day.

Trading Pace

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $322 billion, from $348 billion yesterday. 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 $313 billion.

U.S. government securities lost 0.7 percent in August, after declining 3.5 percent during the previous three months, according to the Bloomberg U.S. Treasury Bond Index. The four-month losing streak is the longest since the period ended March 2011.

Hedge-fund managers and other large speculators increased net-short position in 10-year note futures to the most since May 2012, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 110,825 contracts on the Chicago Board of Trade in the week ending Aug. 27.

Minutes of the Fed’s July FOMC meeting released on Aug. 21 showed policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to taper purchases this year if the economy strengthens, with a few saying a reduction may be needed soon.

Jobs Watch

“Assuming a slightly better NFP print, we’d expect tapering to be announced,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It’s just a question of size and composition.”

U.S. payrolls rose 180,000 this month, and the jobless rate held at 7.4 percent, according to economists surveyed before the Labor Department reports the figures next week.

The Fed will trim its monthly purchases of $85 billion at the next scheduled meeting Sept. 17-18, according to 65 percent of economists in a Bloomberg survey this month.

The securities scheduled to be purchased by the central bank during September should have an average duration of approximately nine years, and will be concentrated in the seven-to 10-year and 20- to 30-year sectors, according to Stone & McCarthy Research Associates, an economic advisory company in Princeton, New Jersey.

Auction Action

Investors bid for 2.43 times the amount of seven-year notes for sale yesterday, the lowest ratio since May 2009. The five-year sale on Aug. 28 drew bids of $2.38 for every dollar sold in debt, the least since July 2009. The Aug. 27 auction of $34 billion of two-year notes, the shortest maturity U.S. coupon debt, attracted the most demand since April.

Treasuries were little changed today as consumer purchases, which account for about 70 percent of the economy, rose 0.1 percent after a revised 0.6 percent increase the prior month that was larger than previously estimated, the Commerce Department reported today in Washington. The median forecast in a Bloomberg survey of economists called for a 0.3 percent rise. Incomes increased 0.1 percent.

The Commerce Department’s price index tied to spending, a gauge tracked by Fed policy makers, increased 1.4 percent in July from the same period in 2012. The core price measure, which excludes volatile food and energy categories, rose 1.2 percent from July 2012. The Fed has a target of 2 percent.

Price Pressure

“We do not have any evidence of increasing inflationary pressures,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, a primary dealer. “The year-over-year deflator is far below 2 percent.”

Consumer confidence declined less than forecast in August. The Thomson Reuters/University of Michigan final index of consumer sentiment for this month fell to 82.1, from 85.1 in July, which was the highest since July 2007. Economists in a Bloomberg survey called for 80.5, according to the median projection after a preliminary reading of 80.0.

U.S. government securities may also be supported by month-end buying to match market indexes. Funds that manage portfolios against benchmark indexes, including the Barclays U.S. Aggregate Index, typically buy longer-maturity Treasuries near the end of the month to align the interest-rate sensitivity of their holdings with the gauges.

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