Treasury 30-Year Bonds Drop as Investors Fight Fed

Treasury 30-year bonds dropped as investors bet on faster inflation even as Federal Reserve Chair Janet Yellen dismissed signs of rising consumer prices.

Benchmark 10-year notes fell for a third week after Yellen said June 18 that the Fed maintains its commitment to low interest rates. Gauges of expectations for consumer prices for periods from five to 30 years widened before the Commerce Department is forecast to report June 26 that the Fed’s preferred measure of inflation rose to the highest since October 2012. The Treasury will sell $107 billion of coupon debt next week.

“The market does seem to be fighting the Fed here,” said James Caron, who manages money in New York at Morgan Stanley Investment Management, which oversees $61 billion of fixed-income assets. “The market believes it’s only a matter of time before those inflation pressures start to manifest.”

The 30-year yield climbed two basis points, or 0.02 percentage point, on the week to 3.43 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 3.50 percent, the most since May 12. The 3.375 percent security maturing May 2044 fell 12/32, or $3.75 per $1,000 face amount, to 98 29/32.

The benchmark 10-year note yield rose less than a basis point on the week to 2.61 percent, and is up from 2.48 percent at the end of May. The yield on two-year Treasuries added one basis point to 0.46 percent for a fourth weekly gain.

‘Risk Premium’

Treasury five-year break-even rates, which measure the difference between yields on benchmark notes and similar-maturity Treasury Inflation Protected Securities, were 2.09 percentage points, the highest since May 2013. The spread, which represent the bond market’s forecast for the pace of consumer price increases during the life of the debt, had been 1.98 percentage points a week ago.

The 10-year break-even rate widened to 2.27 percentage points from 2.18 percentage points, and for 30-year bonds it climbed to 2.35 percentage points from 2.27 percentage points.

“The market is struggling with, will they overshoot in terms of easy money and what are the implications for longer-term inflation?” Margaret Kerins, the Chicago-based head of fixed-income strategy at Bank of Montreal, one of 22 primary dealer that trade with the central bank. “There’s uncertainty there that justifies a risk premium.”

Yellen, at her June 18 press conference, said that the consumer price index has “been a bit on the high side” while adding that the recent “data that we’re seeing is noisy.” She emphasized the Federal Open Market Committee’s view that rates are likely to stay low for a “considerable time.”

Personal Consumption

The Fed’s 2 percent inflation goal is based on the Commerce Department’s personal consumption expenditures price index, which rose 1.8 percent last month from a year earlier, according to the median estimate of 19 economists and strategists in a Bloomberg survey. That’s after a 1.6 percent gain in April that was the most since November 2012.

Fed policy makers at their June 17-18 meeting cut monthly debt purchases by $10 billion, to $35 billion, while leaving the target rate for overnight lending between banks in the range of zero to 0.25 percent, where it has been since December 2008.

Treasuries dropped on June 17 as the cost of living increased 0.4 percent in May from April, the biggest advance since February 2013, according to Labor Department data. It was the third monthly increase.

“The market is voting with its feet and lifting rates because it doesn’t agree with Yellen’s conclusion on CPI,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.

Note Auctions

The Treasury will sell $30 billion of two-year notes on June 24, $35 billion of five-year securities the next day and $29 billion of seven-year debt on June 26. It will also auction $13 billion of two-year floating-rate notes on June 25.

The U.S. government sold $7 billion of 30-year TIPS yesterday at a yield of 1.116 percent, versus the average forecast of 1.093 percent by seven of the Fed’s 22 primary dealers. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.76, up from 2.34 at the previous sale in February.

The primary dealers held $39.8 billion of Treasury notes and bonds as of June 11, up from $6.2 billion on May 23 and the most since Nov. 29, according to central bank data.

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