BLBG:Treasuries Rise on Bets This Week’s Yield Increase Is Excessive
Treasuries advanced for the first time in five days amid speculation the biggest weekly increase in benchmark 10-year yields in two years was excessive.
Longer-maturity bonds led gains after a fund manager at Pacific Investment Management Co. said investors should be buying fixed-income assets after prices fell. Treasury 10-year yields (USGG10YR) climbed to the highest level since August 2011 yesterday after Fed Chairman Ben S. Bernanke said on June 19 that the bank may begin dialing down its quantitative easing this year and end it in mid-2014.
“There is an element of the Treasury market being oversold,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “Bernanke’s comments turned out to be more hawkish than many had anticipated but he reiterated it’s all data dependent. The market seems to be taking a pause to monitor the next round of economic numbers to see if there is a strong ground for the Fed to turn off its liquidity tap.”
The U.S. 10-year yield dropped one basis point, or 0.01 percentage point, to 2.40 percent at 7:04 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2023 rose 1/8, or $1.25 per $1,000 face amount, to 94 9/32. The yield climbed to 2.47 percent yesterday, the highest level since Aug. 8, 2011, and has increased 27 basis points this week, the most since July 2011.
The 30-year yield fell three basis points today to 3.49 percent after rising 17 basis points during the prior two days.
Bernanke, speaking this week after a two-day meeting of the Federal Open Market Committee, said reducing bond purchases 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.
Fed Buying
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 valuations tell you that this is a time to be adding to fixed income rather than trying to follow the crowd out the door,” Myles Bradshaw, a fund manager at Pimco in London, said in an interview on Bloomberg Television’s “The Pulse” with Guy Johnson. “Because of this technical washout we’re beginning to see value coming back into the bond market.”
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index climbed to 96.02 according to the most recent available data on June 20, the highest level since December 2011. It has averaged 60.77 this year.
Rising Volumes
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 was $569 billion on June 20.
Economic reports next week on home prices and durable goods may add to the case for the Fed to curb easing measures.
Orders for durable goods rose 3 percent in May, expanding for a second month, according to the median estimate of economists in a Bloomberg News survey before the Commerce Department on June 25. A separate report the same day will show the S&P/Case-Shiller (SPCS20Y%) index of property values jumped 10.6 percent in April from a year earlier, the surveys show.
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 forecast tapering would start in September.
Term Premium
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.
The Treasury will sell $35 billion in two-year notes on June 25, an equal amount of five-year debt the following day and $29 billion in seven-year securities on June 27.
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
