Treasuries Fall as Yellen Backs Stimulus, Sees Employment Gains

Treasury notes fell as Federal Reserve Chair Janet Yellen said the central bank has a “continuing commitment” to support the recovery even as policy makers see full employment by late 2016.

The difference between yields on five-year notes and 30-year bonds narrowed to the least this month as Yellen said investors should pay attention to any shortfall in inflation and the jobless rate for signals on the Fed’s decision on its policy rate. Treasuries fell earlier as a report showed industrial production increased last month more than forecast, adding to evidence the economy is strengthening.

“It was a speech tilted to the dovish side and the market was expecting that,” said Sean Simko, a money manager who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “She tried to not define a clear path because the economy is not taking a clear path. The Fed remains engaged.”

Benchmark 10-year yields were unchanged 2.63 percent as of 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.75 percent note due in February 2024 was 101 1/32. The yield reached 2.59 percent yesterday, the least since March 3.

Yield Differences

Five-year note yields rose three basis points to 1.65 percent. The 30-year yield dropped two basis points to 3.44 percent after falling to 3.43 percent yesterday, the lowest level since July 3.

The gap between five-year notes and 30-year bonds, known as the yield curve, narrowed to 1.80 percentage points. It touched 1.79 percentage points, reaching the least since March 31.

Treasury trading volume dropped to $303.3 billion, from $391 billion yesterday, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. It reached $582.4 billion on March 13, the highest in more than nine months, according to ICAP.

The Treasury Department is scheduled to sell $18 billion in five-year inflation-indexed bonds tomorrow.

Treasuries due in 10 years and longer have gained this month as deepening tensions in the Ukraine drove demand for the safest assets. The securities have returned 1.9 percent this month and 9.3 percent this year, according to Bloomberg U.S. Treasury Bond Index data.

Rate Watch

“You’re at a point where rates are probably a bit too low,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The market has been able to stay closer to the low-yield range. We’ve been able to stay closer to the bottom, despite a slew of better economic data.”

The Stoxx Europe 600 Index rose 0.7 percent and Standard & Poor’s 500 Index of stocks gained 1.1 percent.

Industrial production rose in March after a February gain that was twice as big as previously estimated, indicating U.S. factories recovered after a weather-depressed start to the year.

Output at factories, mines and utilities climbed 0.7 percent after a revised 1.2 percent increase the prior month, figures from the Federal Reserve showed. The median forecast in a Bloomberg survey of economists called for a 0.5 percent rise.

Capacity utilization, which measures the amount of a plant that is in use, rose to 79.2 percent, the highest since June 2008, from a revised 78.8 percent the prior month, today’s data showed.

Economic Reading

“The better-than-expected industrial production number, particularly capacity utilization, is most welcome,” said Dan Greenhaus, chief global strategist in New York at BTIG LLC. “The bias is higher for yields, eventually pushing north of 3 percent by the end of the year,” he said referring to 10-year yields.

The Fed said the U.S. economy continued to expand in most regions as businesses benefited from a bounce back from harsh winter weather earlier in the year, the central bank said in its Beige Book business survey, based on reports gathered before April 7. Eight of 12 Fed districts characterized growth as “modest or moderate.”

In a speech that outlined the disciplined policy framework she uses, Yellen addressed investors on factors that may influence the policy rate.

“The larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained,” Yellen said in a speech in New York.

Fed Policy

Fed policy makers are unwinding the bond-buying program they have used to support the economy, while keeping their target for overnight lending between banks in a range of zero to 0.25 percent since 2008.

“It’s completely consistent with what she and the Fed has been saying over the past three years,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We’re pretty much weaker. Stocks are at the highs of the day. She just said she still thinks the theme will be lower for longer -- as expected.”

Boston Fed President Eric Rosengren said the central bank should link interest-rate guidance toward both sides of its mandate for full employment and stable prices.

The Fed “could promise to keep short-term interest rates at very low levels until the economy is within one year of reaching full employment and 2 percent inflation,” Rosengren said yesterday in a speech in Bangor, Maine. He said a jobless rate of 5.25 percent represents full employment, versus 6.7 percent in March. Rosengren doesn’t vote on monetary policy this year.

Treasuries rallied yesterday as units from Ukraine’s interior ministry ousted pro-Russian activists who had seized an airfield in Kramatorsk, though there were conflicting accounts on casualties. U.S. Representative Mike Rogers, chairman of the House Intelligence committee, accused Russia of waging a campaign of “sabotage.”

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