Treasuries Rally on Yellen’s Plans to Press On With Debt-Buying

Treasuries rose, pushing 10-year yields down for the first week since October, as Federal Reserve Chairman-nominee Janet Yellen underscored her commitment to strengthening the economy before cutting monetary stimulus.

The difference between five- and 10-year note yields, known as the yield curve, widened to the most in more than two years on Oct. 14, the day Fed Vice Chairman Yellen told Congress at a confirmation hearing that the benefits of bond-buying still outweigh the costs. The Fed will release minutes of its Oct. 29-30 meeting on Nov. 20 while Treasury is scheduled to sell $13 billion in 10-year inflation-indexed debt the next day.

“She came across with a dovish tone,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “The comments around there’s more risk of disrupting the recovery than creating a bubble put a bid into the marketplace.” A so-called monetary-policy dove is thought to favor stimulus and lower interest rates.

The benchmark 10-year yield dropped four basis points this week, or 0.04 percentage point, to 2.71 percent in New York, according to Bloomberg Bond Trader prices. The 2.75 percent note due November 2023 traded at 100 13/32.

The yield drop is the biggest since the week ending Oct. 25. It touched 2.79 percent on Nov. 12, the highest level since Sept. 18. Five-year yields fell seven basis points on the week, the most since Oct. 18.

Futures Moves

Hedge-fund managers and other large speculators trimmed net-short positions in 10-year note futures in the week ending Nov. 12, according to U.S. Commodity Futures Trading Commission data. Bets prices will fall outnumbered long positions by 181,079 contracts on the Chicago Board of Trade, down 8,109 contracts, or 4 percent, from a week earlier.

The yield curve measuring the difference between five-year and 10-year yields reached 1.37 percentage points this week, the most since August 2011, as speculation the Fed’s target interest rate may be lower for longer under a Yellen-led Fed, pressured short-term yields.

“As dovish as Yellen is, she’s dovish for the front end of the curve,” said David Ader, U.S. government bond-strategy head at CRT Capital Group LLC in Stamford, Connecticut.

Treasuries due in 10 years and longer lost 10.2 percent this year through Nov. 14, according to Bloomberg World Bond Indexes. Those maturing between one- and three years returned 0.4 percent, the indexes show.

Term Premium

The 10-year term premium was at 0.24 percent yesterday, based on a valuation model used by the Fed that is calculated by using interest-rate expectations, economic growth and inflation. The gauge touched 0.13 percent on Oct. 29, the most expensive level since June.

The measure has averaged negative 0.03 percent this year, indicating the securities were overvalued. The security is considered at fair value at a term-premium level between 0.25 to 0.75 percent.

The Fed buys $85 billion of Treasuries and mortgage-backed securities each month to keep downward pressure on borrowing costs. Officials will decide to pare purchases to $70 billion a month at their March 18-19 meeting, according to the median of economist estimates in a Bloomberg survey on Nov. 8.

Traders project an 86.5 percent chance the Fed will keep its benchmark rate at current levels by December 2014, compared with a 72.7 percent odds a month earlier, according to fed funds futures data compiled by Bloomberg.

Policy Targets

Fed policy makers have pledged interest rates will stay at almost zero while unemployment remains above 6.5 percent. The jobless rate was at 7.3 percent last month, the Labor Department said Nov. 8.

“It’s important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero,” Yellen said Nov. 14 in Washington.

The U.S. sold $70 billion in debt this week, including $16 billion in 30-year bonds that drew lower-than-average demand as investors favored the three- and 10-year notes sold on signs the Fed will maintain bond-buying.

“In a recovering economy, rates tend to drift higher over time,” said Zach Pandl, a Minneapolis-based senior interest-rate strategist at Columbia Management Investment Advisers, which oversees $340 billion. “The activist Fed is already priced in.”

Auction Update

The bid-to-cover ratio at the Nov. 14 bond sale, which gauges demand by comparing the amount bid with the amount offered, was 2.16, the least since August and less than the average of 2.48 at the past 10 auctions.

At a $24 billion sale of 10-year notes on Nov. 13 indirect bidders purchased 47.7 percent of the notes, the highest level since the June 12 offering of the securities and higher than an average of 38.7 percent for the past 10 sales. At the $30 billion three-year note sale Nov. 12, investors bid 3.46 times the amount of debt on offer, exceeding the average bid-to-cover ratio, as the measure is known, at the previous 10 auctions of 3.32 times.

The U.S. previously sold $13 billion in 10-year Treasury inflation protected securities on Sept. 19 at a yield of 0.5 percent, the highest at an auction of the debt since July 2011. TIPS pay interest at lower rates than regular Treasuries on a principal amount that’s adjusted based on the Labor Department’s consumer price index.

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