Treasuries Selloff Is Biggest in 17 Months on Fed

Treasuries fell, with 10-year note yields rising the most during two days in 17 months, after Federal Reserve Chair Janet Yellen suggested a “patient” approach to interest rates may translate into an increase by the middle of next year.

The yield on the 30-year bond touched the highest level in a week as Yellen said yesterday at a news conference that a rate increase won’t take place for “at least the next couple of meetings.” The difference between two- and 30-year yields widened for the first time in six days as longer-maturity Treasuries led declines. Stocks rose by the most in two years. The Treasury auctioned $16 billion of five-year inflation-indexed securities at the highest yield since April 2010.

“There’s a big rebound in risk assets,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “It’s all the Fed. That’s why you’re seeing 10s and 30s move higher in yields.”

The benchmark 10-year yield rose seven basis points, or 0.07 percentage point, to 2.21 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The 2.25 percent note maturing in November 2024 fell 20/32, or $6.25 per $1,000 face amount, to 100 3/8. The yield has increased as much as 17 basis points the past two days, the most since July 2013.

The Standard & Poor’s 500 Index of stocks rose 2.4 percent, bringing its two-day gain to 4.5 percent, the most since November 2011.

Market Prices

Thirty-year bond yields added nine basis points to 2.82 percent, reaching the highest level since Dec. 11. Two-year yields gained one basis point to 0.63 percent.

Crude oil futures fell 2.8 percent to $54.89 a barrel in New York, after reaching $53.60 on Dec. 16, a five-year low.

The drop in oil price “was one of the main fears and now it’s stabilized,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp.

Treasuries remained lower as a report showed the number of Americans filing for unemployment benefits fell by 6,000 to 289,000 in the week ended Dec. 13, the fewest since early November, a Labor Department report showed.

A separate report showed the Philadelphia Fed Factory index dropped to 24.5, down from 40.8 in the prior survey. The index was below the forecast of 26.

Fed Eatch

“If the data holds up, there’s a reason to believe the Fed could start raising rates,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed.

U.S. government securities have returned 0.2 percent this month and 6.3 percent in 2014 through yesterday, according to the Bloomberg U.S. Treasury Bond Index. They lost 3.4 percent last year.

U.S. consumer prices fell 0.3 percent in November from October, a government report showed yesterday, the biggest decline since December 2008. Crude oil has tumbled 45 percent this year, set for the biggest decline since 2008.

Globally, bond investors anticipate consumer prices will rise at an average pace of 1.06 percent a year, according to Bank of America Corp. data. The average for the past five years is 1.35 percent.

Market inflation expectations, as measured by the spread between two-year nominal and index-linked securities, turned negative for the first time in five years. Policy makers led by Yellen yesterday tempered their previous guidance that rates would stay low for longer.

Central Bank

The Fed said it can be “patient” in its approach to raising the benchmark lending rate from a range of zero to 0.25 percent, where it has been since December 2008. At the same time, policy makers said that language was “consistent” with their prior guidance that rates would be held near zero for a “considerable time” after they ended their asset purchases in October.

The Treasury Inflation Protected Securities, or TIPS, sold today yielded 0.395 percent, compared with an average forecast of 0.385 percent in a survey of six primary dealers.

Indirect bidders, a group of investors that include foreign central banks, purchased 64.8 percent at the sale, the most since Bloomberg started keeping records in October 2004. The auction was rated a ‘4’ on a scale of one through five by four of the Fed’s primary dealers.

The Treasury announced it will sell $104 billion in fixed-and floating-rate notes next week. The U.S. is scheduled to sell $27 billion in two-year notes, $35 billion in five-year notes and $29 billion in seven-year debt on three consecutive days starting Dec. 22.

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