Treasuries Fall Before Fed Releases Meeting Minutes

Treasuries fell before the Federal Reserve issues minutes of its July policy meeting, which investors will examine for clues on when the central bank will begin raising interest rates next year.

The yield on the benchmark 10-year note touched the highest level in almost a week before Fed Chair Janet Yellen speaks at a conference of central bankers Aug. 22 in Jackson Hole, Wyoming. The extra yield 10-year Treasuries gave investors over equivalent German bunds was the most in 15 years as European yields drop and slow economic growth fuels forecasts the region’s central bank will add stimulus measures.

“The long end is still clearly overbought,” said Gabriel Mann, a U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, one of 22 primary dealers that trade with the U.S. central bank. “There’s not much conviction until this week’s Jackson Hole speech. There won’t be much in the way of any surprises” in the Fed minutes.

The U.S. 10-year yield increased one basis point, or 0.01 percentage point, to 2.41 percent at 12:41 p.m. New York time, according to Bloomberg Bond Trader data. It touched 2.42 percent, the highest level since Aug. 14. The yield slid to 2.30 percent on Aug. 15, the lowest since June 2013. The price of the 2.375 percent note due August 2024 fell 3/32, or 94 cents per $1,000 face amount, to 99 21/32.

Five-year note yields advanced two basis points to 1.60 percent. The 30-year bond yield rose as much as two basis points to 3.24 percent, also the highest since Aug. 14, before trading at 3.22 percent. It touched 3.10 percent Aug. 15, the least since May 2013.

Treasury Returns

Mann of RBS recommends buying five-year securities and selling 30-year bonds as a relative-value strategy.

Treasuries returned 4.1 percent this year, after losing 3.4 percent in 2013, according to the Bloomberg U.S. Treasury Bond Index.

The extra yield U.S. 10-year notes offer over their Group of Seven counterparts increased to 75 basis points, the most since reaching 78 basis points on July 31, which was the highest level since 2007. The figure compared with as little as 37 basis points in February.

Germany’s 10-year bund yield fell one basis point to 0.99 percent, meaning investors earn an extra 1.42 percentage points from Treasuries. The difference was the most on a closing-market basis since June 1999, according to data compiled by Bloomberg.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, advanced 1.6 percent in the past month. The euro dropped 1.7 percent.

Jackson Hole

Yellen will deliver the keynote speech at the Jackson Hole conference, where European Central Bank President Mario Draghi will also speak.

The Fed chief will probably reiterate the U.S. central bank’s view that there’s plenty of room for improvement in the labor market, according to Dean Maki, chief U.S. economist in New York at the primary dealer Barclays Plc.

The Federal Open Market Committee’s policy statement after its July meeting cited “significant underutilization of labor resources” as a justification for continued easy-money policies, even though the unemployment rate has fallen faster than Fed officials had forecast. It was 6.2 percent in July, compared with 7.3 percent a year earlier.

Minutes of the meeting will be released at about 2 p.m. in Washington.

Rate Bets

Traders saw a 68 percent chance the Fed will increase its benchmark interest rate to at least 0.5 percent by September 2015, futures contracts show. That compared with a 74 percent likelihood seen at the end of July.

At last month’s meeting, Fed policy makers cut monthly bond-buying by $10 billion for a sixth time, leaving the program on track to end in October. The central bank makes the purchases under the quantitative-easing strategy to hold down longer-term borrowing costs and spur growth.

“We are strategically bearish on Treasuries as we see the Fed moving closer to the exit,” said John Stopford, head of fixed-income at Investec Asset Management Ltd. in London. “The minutes are probably more hawkish than the market thinks.”

A gauge of Treasury-market volatility rose for a third day. Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, was at 62 basis points yesterday, the highest since 62.5 on Aug. 8. The average this year is 59.1 basis points.

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