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Power Hour: Treasury Yields at Almost 2-Year Highs on Fed Taper Speculation

September 4, 2013

Sept. 4 (Bloomberg) -- Treasury 10-year note yields traded at almost two-year highs amid speculation the Federal Reserve’s assessment of regional economies in the U.S. will show strong enough growth to allow policy makers to cut stimulus this month.

Yields on the benchmark notes rose as high as 2.88 percent before today’s Beige Book report from the Fed and data in two days forecast to show employment growth quickened in August, according to a Bloomberg News survey of analysts. The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, gained to almost the most since July 2011.

"If the Fed does anything, it’s going to be a token amount," said Michael Franzese, senior vice president of fixed- income trading at ED&F Man Capital Markets in New York. "The economy is picking up at a slow pace. It’s ebbing along."

Ten-year yields rose one basis point, or 0.01 percentage point, to 2.87 percent as of 12:19 p.m. New York time, based on Bloomberg Bond Trader data. The yield reached 2.93 percent on Aug. 22, the highest since July 29, 2011. The 2.5 percent note due in August 2023 fell 1/8, or $1.25 per $1,000 face amount, to 96 25/32.

The term premium rose to 0.52 percent today after reaching 0.55 percent on Aug. 22. It was negative as recently as June 18.


Fed Tapering


Accelerating U.S. growth has prompted Fed Chairman Ben S. Bernanke to pledge to slow monetary stimulus if the economic expansion meets policy makers’ forecasts. The U.S. central bank will reduce its monthly purchases of $85 billion at its meeting this month, according to 65 percent of economists in a Bloomberg survey last month.

U.S. payrolls rose 180,000 in August, up from 162,000 in July, and the jobless rate held at 7.4 percent, according to economists surveyed before the data are released on Sept. 6.

"Tapering nearly a sure thing," Bill Gross, founder and co-chief investment officer at Pacific Investment Management Co., in Newport Beach, California, wrote in a note on Twitter. Gross estimates a $10 billion reduction in the Fed’s Treasury purchases with "front-end friendly guidance."

Gross’s Pimco Total Return Fund, the world’s biggest bond mutual fund, shed $41 billion, or 14 percent of its assets in the past four months through losses and investor withdrawals.

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