Treasury Volatility Falls on Speculation Fed to Maintain Policy

A gauge of Treasury market volatility fell to a five-month low on speculation the Federal Reserve will maintain its debt purchases at $85 billion a month following a two-day policy meeting that ends Oct. 30.

Three-month implied volatility on 10-year interest-rate swaps was 75.22, a level not seen since May. The average over the past year is 81.41. The gauge is a measure of projected yield fluctuations over the next 90 days. It has fallen from 116.91 in September when some investors speculated the Fed would begin trimming its bond purchases that month. Treasury prices slid as investors prepared to bid on $96 billion of debt over three days starting today.

“The Fed is not tapering yet,” said Ali Jalai, a trader in Singapore at Scotiabank, a unit of Canada’s Bank of Nova Scotia and one of the 21 primary dealers that trade directly with the central bank. “For the next two months, I think they’re going to buy. When the taper was on the table, people were selling the bond market and it was causing a lot of volatility.”

Benchmark 10-year yields rose two basis points to 2.53 percent as of 6:59 a.m. in London, according to Bloomberg Bond Trader prices. The yield is below its average over the past decade of 3.52 percent. The price of the 2.5 percent note due August 2023 declined 1/8, or $1.25 per $1,000 face amount, to 99 25/32. A basis point is 0.01 percentage point.

The Bloomberg U.S. Treasury Bond Index has risen 0.7 percent in October, leaving it down 1.8 percent for 2013.

Japan’s 10-year yield was little changed at 0.615 percent. The nation’s government securities have returned 0.6 percent this month and 2.5 percent for the year, based on the Bloomberg Japan Sovereign Bond Index.

Below Average

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, averaged $260.8 billion last week. The average this year is $315.4 billion.

Bank of America Merrill Lynch’s MOVE Index, another measure of volatility in Treasuries, was as low as 62.05 last week, the least since May.

U.S. central bankers will pare the monthly pace of asset buying to $70 billion from $85 billion at their March 18-19 meeting, according to the median of responses in a Bloomberg News survey of economists.

The Treasury plans to sell $32 billion of two-year notes today, $35 billion of five-year securities tomorrow and $29 billion of seven-year debt the following day.

At the last two-year sale on Sept. 24, investors bid for 3.09 times the amount of debt available. The average over the past 12 of the monthly auctions is 3.43.

Retail Stalling

U.S. retail sales probably stalled in September, analysts said before economic reports this week.

Economists forecast no change in purchases, which would be the worst reading in six months, after a 0.2 percent advance in August, according to the median forecast in a Bloomberg survey of banks and securities companies before the Commerce Department report Oct. 29.

Figures today will show industrial production climbed for a second month and pending home sales were unchanged after falling from June through August, based on separate surveys.

Ten-year yields in the range of 2.474 percent to 2.399 percent are “poised to bottom and turn higher over the coming sessions,” according to MacNeil Curry, a technical strategist at Bank of America Merrill Lynch. A move to the mid-October high of about 2.759 percent is likely, New York-based Curry wrote in a report yesterday.

Ten-year yields will finish 2013 at 2.6 percent, Jay Barry, Kimberly Harano, Bruce Sun and Devdeep Sarkar at JPMorgan Chase & Co. in New York wrote in a report Oct. 25. Merrill Lynch and JPMorgan are both primary dealers.

The 16-day government shutdown this month will help send yields down, said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., part of Japan’s second-largest publicly traded bank by market value.

“Yields will continue to go lower,” Shimazu said. “The Fed will continue its monetary policy. The government shutdown will have a bad impact on the economy.”

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