Treasuries Post First Monthly Decline Since August on Fed ViewsDaniel Kruger
Treasuries had their first monthly loss since August on speculation that November jobs gains may signal faster economic growth and convince the Federal Reserve to vote next month to scale back bond-buying.
The benchmark 10-year yield rose amid improving economic indicators, starting with a report showing the economy created more jobs than forecast in October and increases in retail sales and home prices. A $29 billion auction of seven-year notes on Nov. 27 attracted the least demand since May 2009. The Labor Department report on Dec. 6 may show employers added 183,000 jobs this month and the unemployment rate dropped to 7.2 percent, the lowest level since 2008, according to Bloomberg surveys of economists.
“The market is going to price in some probability for the Fed at each and every meeting for the possibility that they taper,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “Next week, we’ll learn a lot more when we get the report for employment in November, and obviously that will be a key determinant in what the Fed does.”
The benchmark 10-year note yield rose 19 basis points this month, or 0.19 percentage point, to 2.75 percent in New York, according to Bloomberg Bond Trader prices. The 2.75 percent securities maturing in November 2023 traded at 100 1/32. The yield reached 2.86 percent on Nov. 21, the highest level since Sept. 18.
Treasuries lost 0.4 percent in November as of Nov. 28, and were down 2.3 percent in 2013, based on the Bloomberg U.S. Treasury Bond Index.
The yield on five-year notes rose four basis points to 1.37 percent. The gap between five- and 10-year yields widened to 1.43 percentage points on Nov. 20, the most since July 2011 as investors bet any move to reduce bond purchases is accompanied by forward guidance from policy makers that would extend the Fed’s commitment to holding its overnight target rate between zero and 0.25 percent for a longer period.
U.S. 10-year note yields closed about four basis points below their level of Aug. 30 when the consensus among investors was that the Fed would begin ratcheting back bond purchases at its September meeting.
“You’ve been fooled by the Fed” in September when policy makers unexpected opted not to reduce purchases, said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “This is the one big question everybody’s focused on.”
Monthly job growth is averaging 186,300 this year, the most since 2005. The projected November jobs gain would be less than the 204,000 increase in October, while the jobless rate would be down from 7.3 percent the previous month.
Retail sales rose 0.4 percent in October, the Commerce Department said Nov. 20, the biggest jump in three months. Home prices in 20 U.S. cities rose by the most since February 2006 in the 12 months through September, an S&P/Case-Shiller index of property values showed Nov. 26.
“Thoughts of possible tapering in December” have driven 10-year yields higher on the month, said Matthew Duch, a fund manager at Calvert Investments in Bethesda, Maryland, which oversees more than $12 billion in assets. “You’ve got to get strong, confirmable numbers to justify any action in December.”
Fed officials said they may reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves, minutes of their last meeting issued on Nov. 20 show. The central bank plans to purchase $45 billion in Treasuries in December via 18 operations, including two each on Dec. 3 and Dec. 19, according to a statement published on the Fed Bank of New York website.
A cut in Fed bond purchases is “on the table” for the next policy meeting Dec. 17-18 depending on the performance of the economy, Fed Bank of St. Louis President James Bullard said last week.
Treasury sold $96 billion of coupon-bearing securities this week. Stronger demand at the shorter-maturity auctions reflected the central bank’s statements that it will keep short-term interest rates at almost zero beyond reports of stronger economic growth.
Demand at the seven-year note sale, as measured by the bid-to-cover ratio that compares total bids with the amount of securities offered, was 2.36, compared with average for the past 10 auctions of 2.59. A $32 billion offering of two-year notes Nov. 25 attracted a 3.54 ratio, the most since April, while the Fed’s 21 primary dealers retained the smallest share of the Nov. 26 offering of $35 billion five-year debt since July.
“Forward guidance takes you out to five years” and “will keep the front end firm,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “The back end has got an issue. Accounts are trying to sell the back end because they’re afraid of tapering in December.”
Investors bid $2.86 for each dollar of the $1.964 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.