U.S. 5-Year Yields Up in Longest Streak in 3 Months on Fed Bets

Treasury five-year note yields rose for a fourth week, the longest stretch since September, as signals the economy is improving fueled bets a decision by the Federal Reserve to start cutting bond purchases may be imminent.

The yields reached the highest level in almost three months as U.S. retail sales jumped more than forecast and the House of Representatives passed the first bipartisan U.S. budget in four years, fueling bets fiscal progress will make it easier for the Fed to reduce stimulus. Central-bank policy makers meet Dec. 17-18. The Treasury will sell $112 billion of notes next week in the final auctions of coupon debt for 2013.

“The market has gotten this sense that March is too far away” for the Fed to wait, said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the U.S. central bank. “The probability of a December-taper announcement has risen.”

The five-year note yield rose four basis points, or 0.04 percentage point, to 1.53 percent this week in New York, according to Bloomberg Bond Trader prices. Its last four consecutive weekly increases ended Sept. 6. The 1.25 percent security maturing November 2018 fell 6/32, or $1.88 per $1,000 face amount, to 98 21/32.

Five-year yields touched 1.55 percent yesterday, the highest level since Sept. 18. They reached a 2013 low of 0.64 percent on May 1.

Ten-year note yields advanced less than one basis point to

2.86 percent, and 30-year bond yields declined two basis points to 3.87 percent.

Yield Spread

The difference between yields on 10- and 30-year Treasury securities narrowed to 1.01 percentage points, signaling investors expect a slowdown in Fed bond-buying to impede a rise in inflation. The spread was the narrowest since Sept. 17.

The Fed buys $85 billion of bonds each month to push down borrowing costs and fuel economic growth. Minutes of policy makers’ Oct. 29-30 meeting, released Nov. 20, showed they expected economic data to indicate improvement in the labor market and “warrant trimming the pace of purchases in coming months.” The central bank’s mandate is to ensure both full employment and price stability.

The Federal Open Market Committee will start slowing the purchases at its meeting next week, according to 34 percent of economists surveyed on Dec. 6 by Bloomberg, an increase from 17 percent in a Nov. 8 poll. Others predicted tapering will start next year.

Benchmark Rate

The central bank has kept its benchmark interest-rate target at zero to 0.25 percent since 2008 to support the economy. Fed Chairman Ben S. Bernanke said last month the rate will probably stay low long after bond buying ends.

U.S. retail sales rose for a second month in November, increasing 0.7 percent to beat a Bloomberg survey’s forecast for a gain of 0.6 percent, the Commerce Department reported on Dec.

12. The data followed a Labor Department report Dec. 6 that showed U.S. employers added 203,000 jobs in November, exceeding forecasts, and the unemployment rate dropped to a five-year low of 7 percent.

“We’ve had a string of economic data that’s been better than expected,” Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc., said yesterday. “The path of least resistance is still to higher yields.”

Treasuries rose briefly yesterday after the Labor Department reported the U.S. producer price index unexpectedly fell 0.1 percent in November after a 0.2 percent drop the prior month. A Bloomberg survey called for no change. The so-called core measure, which excludes food and energy, rose 0.1 percent.

‘Extremely Low’

“We know that’s not the Fed’s preferred measure of inflation, but the Fed’s preferred measure of inflation is extremely low also,” said Michael Lorizio, senior trader at Manulife Asset Management in Boston. “This lends more to the argument that if the inflation portion of their dual mandate is nowhere near their goal, until it’s near their goal how can they tighten policy?”

The Fed’s preferred inflation gauge, the personal consumption expenditures deflator, rose 0.7 percent in October above the year-earlier period, the least since 2009, data showed last week.

House passage of a U.S. budget in a 332-94 vote on Dec. 12 cleared the way for final Senate approval next week to ease $63 billion in spending cuts and avert another government shutdown. The compromise budget was crafted by Democratic Senator Patty Murray and Republican Representative Paul Ryan. President Barack Obama said he’ll sign the final measure.

Treasury Supply

The Treasury will sell $32 billion in two-year notes on Dec. 17, $35 billion in five-year securities the following day and $29 billion of seven-year debt on Dec. 19. It will also offer $16 billion in five-year inflation-indexed securities on Dec. 19.

Auctions this week of $13 billion in 30-year bonds and $21 billion in 10-year notes drew weaker-than-average demand amid speculation the Fed will soon cut its bond buying. An offering of $30 billion of three-year securities attracted stronger-than-average demand.

The 30-year sale’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount of debt offered, was

2.35, compared with an average of 2.42 at the previous 10 auctions. The yield was 3.900 percent, the highest since July

2011. The coverage ratio at the 10-year note offering was 2.61, versus a 10-sale average of 2.71. The three-year note offering had a 3.55 ratio, versus a 3.3 average at the previous 10 sales.

“This week’s auctions show that people are still very comfortable in the short end, with the Fed expected to be on hold,” Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, said Dec. 12. As a primary dealer, the firm is required to bid in U.S. debt sales. “When you get out too far, it becomes a more dicey situation, and it shows the uncertainty that has taken root in the market.”