BLBG:U.S. Treasuries Set for Biggest Weekly Yield Rise in 15 Months
U.S. Treasuries are poised for their biggest weekly losses in 15 months, even as they snapped four days of declines, on prospects the Federal Reserve will start to reduce bond purchases.
Speculation that bond yields will rise further prompted a selloff in government securities worldwide. Rates in Australia climbed by the most since 2001, while German bund yields increased for a second day. Fed Chairman Ben S. Bernanke said June 19 that the bank may begin dialing down its quantitative easing this year and end it in mid-2014. The U.S. Treasury Department is scheduled to sell $99 billion of two-, five- and seven-year securities next week.
“Given that so much of the price action has been dependent on the quantitative-easing program, global markets have reacted negatively to Bernanke’s comments suggesting a tapering,” said Timothy Jung, a rates strategist at Westpac Banking Corp. (WBC) in Sydney. “The idea that Fed liquidity may be coming to an end has had a big impact on U.S. Treasuries.”
The 10-year Treasury yield dropped three basis points to 2.39 percent as of 10:28 a.m. in London after yesterday touching 2.47 percent, the highest since Aug. 8, 2011, according to Bloomberg Bond Trader prices. The price of the 1.75 percent security due in May 2023 rose 7/32, or $2.19 per $1,000 face amount, to 94 3/8.
The yield has climbed 26 basis points this week, the biggest advance since the five days ended March 16, 2012.
‘Fair Value’
“We expect bond rates to rise further and swap spreads to widen in the near term, before markets stabilize,” wrote BNP Paribas analysts including head of U.S. rate strategy Bulent Baygun. “Our model indicates a fair value of about 2.30 percent for 10-year (USGG10YR) Treasuries.”
German benchmark 10-year yields rose to 1.70 percent, the highest since February. The yield on similar-maturity Greek debt exceeded 11 percent for the first time in more than a month. All euro-region sovereign bonds are set for weekly losses.
Australia’s 10-year yield rose 12 basis points to 3.76 percent today, taking this week’s advance to 39 basis points, the most since November 2001. New Zealand’s 10-year rate climbed 37 basis points since June 14 to 4.10 percent, the biggest five-day gain since March 2009.
The yield on Singapore’s 2022 bond climbed to 2.48 percent today from 2.35 percent at the close yesterday, set for set for its highest close since April 2011, according to data compiled by Bloomberg and the Monetary Authority of Singapore. Japan’s 10-year rate rose 2 1/2 basis points to 0.875 percent.
Fed Tapering
The Fed will cut its $85 billion in monthly bond purchases by $20 billion at the Sept. 17-18 policy meeting, according to 44 percent of 54 economists surveyed by Bloomberg after Bernanke’s June 19 press conference. In a June 4-5 survey, only 27 percent of economists forecast tapering would start in September.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index climbed to 96.02 on June 20, the highest level since Dec. 09, 2011. It has averaged 60.8 this year.
Trading volume has been rising, with the amount changing hands through ICAP Plc, the largest inter-dealer broker of U.S. government debt, averaging $403 billion a day since the start of May. That’s up from an average of $281 billion in the first four months of the year. Volume increased to $569 billion on June 20.
Bernanke, speaking after a two-day meeting of the Federal Open Market Committee, said the tapering would depend on the economy achieving the central bank’s objectives. Policy makers are forecasting growth of as much as 2.6 percent this year and 3.5 percent in 2014.
Asset Purchases
The Fed has been buying $45 billion of Treasuries and $40 billion of mortgage securities each month to put downward pressure on borrowing costs in its third round of asset purchases. It has kept its target rate for overnight lending between banks at zero to 0.25 percent since December 2008 to support the economy.
The Treasury Department will sell $35 billion in two-year securities on June 25, an equal amount of five-year debt the next day and $29 billion in seven-year bonds on June 27.
Economic reports next week on home prices and durable-goods orders may add to the case for the Fed to curb its easing measures.
The U.S. Commerce Department is likely to say on June 25 that orders for U.S. durable goods rose 3 percent in May from April, expanding for a second month, according to the median estimate of economists in a Bloomberg News survey.
Property Values
A separate report may show the same day that the S&P/Case-Shiller (SPCS20Y%) index of property values jumped 10.6 percent in April from a year earlier, according to another poll of economists. That would almost match March’s increase which was the most in seven years.
The U.S. 10-year term premium, a model that includes expectations for interest rates, growth and inflation surged to minus 0.05 percent, the most since July 2011. The figure has risen from the record low of minus 1.02 percent set in July. A negative reading suggests investors are willing to accept yields below what’s considered fair value.
Treasuries have fallen 2.2 percent this year through June 20, according to the Bloomberg U.S. Treasury Bond Index. (BUSY)
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
