Treasuries Rise 1st Time in 4 Days on Yellen Speculation

Treasuries rose for the first time in four days as traders speculated Federal Reserve Chair Janet Yellen will emphasize weakness in the U.S. labor market in her speech tomorrow at a conference of central bankers.

The yield curve, the difference between five- and 30-year U.S. debt yields, flattened to the lowest level in three weeks. Yellen has cited labor-market slack as a reason for low interest rates. The Federal Open Market Committee debated the issue last month, and “many” policy makers said they may raise rates sooner than they anticipated, meeting minutes showed yesterday. The U.S. sold $16 billion of five-year inflation-linked notes.

“People are looking for Yellen to temper a lot of the disappointment of the FOMC,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 22 primary dealers that trade with the Fed. “They’re expecting something that’s much more soothing for bond bulls.”

The 10-year note yield dropped two basis points, or 0.02 percentage point, to 2.41 percent at 5 p.m. in New York, Bloomberg Bond Trader data show. It increased earlier to 2.45 percent, the highest since Aug. 13. The price of the 2.375 percent debt due August 2024 gained 5/32, or $1.56 per $1,000 face amount, to 99 23/32.

Thirty-year bond yields fell three basis points to 3.19 percent. Five-year note yields dropped as much as two basis points to 1.61 percent before trading little changed at 1.63 percent. They touched 1.64 percent earlier, also the highest since Aug. 13.

“The long end is a bit rich,” Kohli said. “We still like the five-year part of the curve.”

Yield Curve

The yield curve flattened for a second day, reaching 156 basis points, the lowest on a closing basis since July 30. Shorter-term yields were little changed amid bets the Fed will raise interest rates next year, while longer-maturity yields retreated on the outlook for low inflation. The consumer price index increased 0.1 percent in July from June, the slowest pace in five months, Commerce Department data showed Aug. 19.

The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 9.5 percent to $264 billion. This year’s average is $324 billion. Daily volume reached $504 billion on Aug. 1, the highest level in three months.

Volatility Drops

A gauge of Treasury-market volatility fell from the highest level in more than two months. Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, dropped to 60.2 basis points, from 62.8 basis yesterday. The 2014 average is 59.1 basis points.

Treasury 10-year yields will rise to 2.92 percent by the end of the year, according to the median forecast of analysts in a Bloomberg News survey.

The minutes of the FOMC’s July meeting said Fed officials “noted that if convergence toward the committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

Some policy makers “were increasingly uncomfortable” with the central bank’s guidance on keeping its benchmark interest- rate target low for a “considerable time.” The rate has been held in a range of zero to 0.25 percent since 2008.

‘Off Balance’

“If the minutes’ message suggested anything to the market, it was a warning that the Fed could shift more hawkish sooner than later, catching many off balance,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, wrote in an e-mail.

Fed Bank of Philadelphia President Charles Plosser said the central bank needs to be more responsive to economic data and is running a risk by delaying an interest-rate increase. The consequence of waiting too long on rates can be “dire,” he said. Plosser spoke on CNBC.

Traders saw a 51 percent chance the Fed will increase its benchmark interest rate to at least 0.5 percent by July 2015, futures contracts showed. That compared with a 48 percent likelihood seen Aug. 19, the day before Fed minutes were released.

Yellen is scheduled to speak tomorrow at the Kansas City Fed’s annual symposium in Jackson Hole. The focus of the three-day conference, which begins today, is labor-market dynamics, according to the Fed. European Central Bank President Mario Draghi is also among the speakers.

“Most people are confident she’ll be dovish tomorrow,” said Charles Comiskey, New York-based head of Treasury trading at Bank of Nova Scotia in New York, a primary dealer. “People who got short are covering.” Short positions are bets a security will fall in price.

Treasury Auctions

The Treasury Department announced it will sell $93 billion in notes next week: $29 billion in two-year securities, $35 billion in five-year debt and $29 billion in seven-years. The amounts are unchanged from the July auctions of the maturities. The Treasury will also sell $13 billion in two-year floating-rate notes at an Aug. 27 auction.

The extra yield 10-year notes offer over their Group of Seven counterparts reached 77 basis points, widening from this year’s low of 37 in February, before slipping to 74. It touched 78 basis points on July 31, the most since 2007.

The Treasury Inflation Protected Securities sold today yielded negative 0.281 percent, compared with the average forecast of negative 0.271 percent in a Bloomberg News survey of five of the Fed’s 22 primary dealers.

Investors have been willing to accept negative yields on the notes since 2010 because yields on comparable-maturity fixed-rate U.S. securities are close to historic lows and they receive an adjustment to the principal value based on changes in the consumer price index.

Indirect bidders, the investor class that includes central banks outside the U.S., purchased 56.3 percent of the notes sold. That compared with 58.4 percent in April, the most since the government revived sales of the securities in 2004.

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