Treasuries Fall on Speculation Fed Won’t Stop Tapering Purchases

Treasuries fell amid bets the Federal Reserve will push on with reductions to its bond-purchase program, viewing weak economic data this year as reflecting harsh weather rather than a faltering recovery.

Government securities fluctuated after U.S. factory production unexpectedly dropped by the most since 2009, while a gauge of consumer confidence held steady. Data yesterday showed retail sales sank and jobless claims rose. Dallas Fed President Richard Fisher said policy makers should keep cutting bond-buying even as winter weather slows growth. Fed Chairman Janet Yellen said this week only a “notable change” in economic prospects could prompt a slowing in the pace of the reductions.

“The Fed will not alter their tapering plans; Yellen made it clear,” said David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors. “It’s difficult to say where the economy is right now. We’ve had a lot of weather noise.”

The 10-year note yield rose one basis point, or 0.01 percentage point, to 2.74 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. It touched 2.78 percent yesterday, the highest level since Jan. 29. The yield advanced six basis points in the past five days in a second weekly increase. The price of the 2.75 percent security maturing in February 2024 declined 3/32, or 94 cents per $1,000 face amount, to 100 2/32.

Five-year note yields increased two basis points to 1.53 percent. They touched 1.58 percent Feb. 12, the highest level since Jan. 29.

Volume Drops

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, slid 25 percent to $234 billion, the least since Feb. 10. It reached $494 billion on Jan. 29, the most since June.

Hedge-fund managers and other large speculators increased their net-short position in five-year note futures in the week ended Feb. 11 to the most since October, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 137,867 contracts, on the Chicago Board of Trade. They rose 36 percent from a week earlier, the Washington-based commission said.

Fisher said he would favor trims in bond buying at each Fed meeting unless he sees “something truly frightening” in the nation’s economy.

“I am not persuaded continuing to taper should be altered,” the Dallas Fed chief said in a Bloomberg Radio interview with Kathleen Hays and Vonnie Quinn. “Even the Fed cannot offset Mother Nature. The economy has been moving in the right direction.”

Yellen Pledge

Yellen pledged to the House Financial Services Committee on Feb. 11 to maintain the policies of her predecessor, Ben S. Bernanke, scaling back bond-buying under the quantitative-easing stimulus strategy in “measured steps.”

The central bank has cut its monthly purchases of Treasuries and mortgage debt to $65 billion, from $85 billion last year, citing economic improvement. The buying is designed to hold down long-term borrowing costs and fuel growth. The Fed bought $1.25 billion of Treasuries today due from February 2036 to August 2043 as part of the program.

Market volatility fell to the lowest level in almost nine months yesterday after Congress approved a 13-month suspension in the federal borrowing limit and as economic data were weaker than forecast. Volatility measured by the Bank of America Merrill Lynch MOVE Index dropped to 58.09 yesterday, the lowest level since May 16.

The Thomson Reuters/University of Michigan preliminary index of U.S. consumer sentiment was unchanged in February from a month earlier at 81.2. The median estimate in a Bloomberg survey of 74 economists called for a decline to 80.2. Forecasts ranged from 76.5 to 86.

Assembly Lines

The 0.8 percent decrease in January at U.S. manufacturers followed a revised 0.3 percent gain the prior month that was weaker than initially reported, figures from the Fed showed today in Washington. The median forecast in a Bloomberg survey called for a 0.1 percent advance. Assembly lines slowed as colder weather tempered production, the Fed said.

Total industrial production fell 0.3 percent even as utility output rose the most in almost a year.

“They will be looking toward March or April to get a better read,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed.

Treasuries rose yesterday as U.S. reports showed the unexpected drop of 0.4 percent in retail sales in January and the increase in initial claims for jobless benefits last week.

‘Cooling Off’

“We can point to weather as a contributing factor, but I think it’s more than weather,” said Adrian Miller, fixed-income strategies director at GMP Securities LLC in New York. “We’re seeing a little bit of a cooling off, a dampening of activity. We now need to begin to see data that’s non-weather related that gives us an indication of where this economy is going.”

Yesterday’s data followed two consecutive monthly employment reports that fell short of economists’ predictions as weather depressed readings on job growth. Employers added 113,000 workers in January and by 75,000 in December, the smallest back-to-back gains in three years.

Treasury one-month bill rates matched the lowest level since July, negative 0.0101 percent, before trading at 0.01 percent. They climbed to 0.137 percent on Feb. 4, the highest since October, amid concern Congress would deadlock over a debt-limit suspension that expired Feb. 7.

The House of Representatives passed borrowing-limit legislation on Feb. 11. Speaker John Boehner and many in his leadership team were among the 28 Republicans who joined with Democrats to pass a suspension of the debt ceiling until March 15, 2015, without any policy conditions. The Senate approved it the next day, sending it to President Barack Obama.

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