Treasury Yields Are Near Two-Year High as Safety Demand Recedes

Treasury 10-year yields were four basis points from a two-year high after U.S. President Barack Obama called for a pause in authorizing a military strike against Syria, easing demand for safer assets.

A term-premium model signals 10-year bonds are near the cheapest since May 2011 before the government auctions $21 billion of the securities today. Federal Reserve Bank of New York President William C. Dudley will speak tomorrow amid speculation the central bank will decide at its meeting next week to slow its $85 billion monthly debt purchases.

“There are quite a few investors who have to dump their positions because selling is leading to more selling,” said Akira Takei, the head of the international fixed-income department in Tokyo at Mizuho Asset Management Co., which manages the equivalent of $37 billion. “Treasuries have become substantially cheaper relative to other bonds.”

The yield on the benchmark 10-year note was little changed at 2.97 percent as of 6:51 a.m. in London after climbing five basis points, or 0.05 percentage point, yesterday. It touched 3.01 percent on Sept. 6, the highest since July 2011. The price of the 2.5 percent note due in August 2023 was 96, according to Bloomberg Bond Trader data.

Japan’s benchmark 10-year note yield added half a basis point to 0.74 percent in Tokyo. It fell to as low as 0.705 percent on Aug. 30, a level unseen since May 10.

Obama said he’d asked Congress to delay a vote authorizing the use of military force against Syria while the administration pursues a proposal that would have the Middle Eastern country surrender its chemical arms.

Syria Situation

The U.S. will work in consultation with Russia and China at the United Nations Security Council to get rid of Syria’s chemical weapons and to “ultimately destroy them under international control,” the Obama said from the White House in a televised speech.

Fed Chairman Ben S. Bernanke and his colleagues will probably decide at their Sept. 17-18 meeting to reduce monthly purchases of Treasuries to $35 billion from $45 billion while maintaining mortgage-bond buying at $40 billion, according to the median of 34 responses in a Bloomberg News survey of economists.

Bill Gross, the manager of the world’s biggest bond mutual fund at Pacific Investment Management Co., said “forward guidance is the Fed new policy,” stabilizing for shorter-term yields, according to his post on Twitter.

The 10-year term premium, which reflects expectations of interest rates, economic growth and inflation, was at 0.58 percent today. It reached 0.63 percent on Sept. 5, the most since May 2011.

Bond Returns

U.S. government bonds have lost 1.7 percent since the end of June, set for a fourth consecutive quarterly decline, according to a Bank of America Merrill Lynch index. That would be the longest losing streak on record dating back to 1978. The Standard & Poor’s 500 Index of U.S. shares has returned 5.3 percent this quarter, including dividends reinvested into the gauge.

DoubleLine Capital LP’s Jeffrey Gundlach said the Fed is making a “big mistake” in the way it’s ending its asset-purchase program.

“We thought the Fed wouldn’t walk away from QE,” or quantitative easing, and would buy securities until targeted yields were reached like in Japan and Europe, Gundlach said during a webcast for investors. Instead, the central bank is opting for a “seat of the pants” way of handling policy, said the manager, whose firm is based in Los Angeles.

U.S. Inflation

Labor Department data due Sept. 13 will probably show wholesale prices excluding food and fuel rose 1.3 percent in August from a year earlier, according to the median estimate of economists surveyed by Bloomberg News. It advanced 1.2 percent in July, the smallest gain since November 2010.

The report will follow government figures released on Sept. 6 that showed payrolls in the U.S. climbed less than economists had estimated last month.

“There’s little justification for higher yields from the perspective of U.S. inflation,” said Kiyoshi Ishigane, a senior strategist in Tokyo at Mitsubishi UFJ Asset Management Co., which oversees the equivalent of more than $70 billion. “The U.S. economy is in a so-so state, but it’s not strong enough to spur a large-scale rise in wages, pushing up inflation.”

Previous Auction

The 10-year notes scheduled for sale today yielded 2.98 percent in pre-auction trading, rising from 2.62 percent at the previous sale of the securities on Aug. 7. Investors bid for 2.45 times the amount of available debt last month, the lowest bid-to-cover ratio since March 2009.

Indirect bidders, which include foreign central banks, purchased 46 percent of the securities, compared with the average of 37 percent for the previous 10 auctions. Direct bidders, non-primary dealers buying for their own accounts, purchased 15 percent of the notes, versus the 10-sale average of 22 percent.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased 43 percent to $350 billion yesterday. The 2013 average is $315 billion.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index was 101.81 yesterday, the seventh consecutive day above 100, the longest stretch since November 2011. The average of this year is 70.99.

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