Treasury Yields Climb to Highest Since 2011 as Tapering to Begin

Treasury yields rose to the highest levels since 2011 as the Federal Reserve prepared to start cutting bond purchases amid data that signaled the recovery of the world’s biggest economy is picking up speed.

Ten-year note yields exceeded 3 percent and 30-year yields approached 4 percent before a report forecast to show the unemployment rate held at a five-year low. Fed Chairman Ben S. Bernanke said yesterday the headwinds that have held back the U.S. economy may be abating. A gauge of traders’ outlook for inflation rose to a three-month high. The Treasury is scheduled to sell $64 billion of notes and bonds next week.

“The Fed has been extraordinarily accommodative for the last five years, and I think overall that’s built up some momentum in the economy,” said Richard Bryant, a trader at Mizuho Securities USA Inc. in New York, one of the 21 primary dealers that trade with the central bank. “People are more convinced than they have been in years past that 2014 could be the year where we get the move to higher yield levels that people have been predicting.”

The 10-year note yield ended the week little changed at 2.99 percent in New York, according to Bloomberg Bond Trader data, as investors attracted by its high level pushed it below 3 percent. It reached 3.05 percent, the most since July 2011, on Jan. 2. The price of the benchmark 2.75 percent security maturing in November 2023 rose 1/32, or 31 cents per $1,000 face amount, to 97 29/32.

Thirty-year bond yields slipped one basis point, or 0.01 percentage point, to 3.92 percent after reaching 3.97 percent Jan. 2, the highest since August 2011. The yield on the five-year note dropped one basis point to 1.73 percent, the first weekly loss since Nov. 15.

Economy’s Progress

Bernanke, in a speech yesterday in Philadelphia four weeks before his term expires, said the economy “has made considerable progress.” He cited payroll employment rising by 7.5 million since 2010 and growth in 16 of the 17 quarters after the recession ended as evidence the Fed’s policies have succeeded.

“Everything comes down to Fed expectations versus reality,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “We should stay near the 3 percent level until we get a good handle on what the economic numbers will be for the first quarter.”

Ten-year note yields will increase to 3.38 percent by the end of 2014, according to a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.

Inflation Bets

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt called the break-even rate, widened yesterday to as much as 2.27 percentage points, the most since Sept. 23. It was 2.09 percentage points on Dec. 6, and the average over the past decade is 2.22 percentage points.

The Fed said Dec. 18 it will cut its bond purchases under the quantitative-easing stimulus strategy to $75 billion a month from $85 billion, starting in January. It may take further “measured steps” depending on how the economy performs, officials said in a statement. It will now buy $40 billion of Treasuries and $35 billion of mortgage bonds a month.

The central bank will make its first Treasuries purchase under the smaller program on Jan. 6, buying as much as $1.5 billion of securities due from February 2036 to November 2043.

Policy makers will pare purchases by $10 billion in each of its next seven meetings before ending the program late this year as the economy strengthens and unemployment decreases, according to analysts surveyed by Bloomberg Dec. 19.

Annual Loss

The prospect of tapering sent U.S. government securities down 3.4 percent in 2013, the first annual decline since 2009’s record 3.7 percent loss, the Bank of America Merrill Lynch U.S. Treasury Index shows. It returned 2.2 percent in 2012.

Treasuries’ 2013 drop was only the fourth in Bank of America Merrill Lynch data going back to 1978. They also declined in 1994 and 1999. The loss last year compared with a 0.4 percent decline in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index.

Ten-year yields exceeded 3 percent this week for the first time since September as the Conference Board’s index of U.S. consumer confidence rose and the S&P/Case-Shiller index of property prices in 20 U.S. cities climbed 13.6 percent in October from a year earlier, the most since February 2006.

U.S. gross domestic product expanded at a 4.1 percent annualized rate in the third quarter, data showed on Dec. 20, the strongest growth since the final three months of 2011 and up from a previous estimate of 3.6 percent.

‘Heading Higher’

“We do see rates heading higher from here,” said Mark Cernicky, a bond manager at Principal Global Investors in Des Moines, Iowa, which oversees $292.4 billion. “I don’t think we’re going to see the velocity we had in May and June.”

U.S. employers added 195,000 jobs in December, economists in a Bloomberg survey forecast before the Labor Department reports the data Jan. 10. The unemployment rate held at 7 percent, the lowest level since November 2008, economists projected.

The central bank will release minutes of its December Federal Open Market Committee policy meeting on Jan. 8.

In a statement after the meeting, Fed officials also said it “likely will be appropriate to maintain the current target range for the federal funds rate well past” their 6.5 percent jobless-rate threshold, especially if inflation stays below the central bank’s 2 percent target. The benchmark interest rate has been a range of zero to 0.25 percent since 2008.

The odds the Fed will raise the interest-rate target by January 2015, based on data compiled by Bloomberg from futures contracts, increased to 26 percent, from 11 percent at the end of November.

The U.S. Treasury will auction $30 billion in three-year notes, $21 billion in 10-year securities and $13 billion in $30 year bonds next week in three sales starting Jan. 7.

Before it's here, it's on the Bloomberg Terminal.