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U.S. 10-Year Yield Drops From 2-Month High Before Bernanke Talk

May 20, 2013

May 20 (Bloomberg) -- Treasuries rose, pushing 10-year note yields down from almost a two-month high, before Federal Reserve Chairman Ben S. Bernanke discusses the economic outlook in congressional testimony this week.

Benchmark 10-year note yields rose the past three weeks, the longest streak this year, as the economy showed signs of strength, prompting speculation the Fed may taper its monetary- stimulus program, known as quantitative easing. The Fed publishes minutes of the April 30 to May 1 policy meeting on May 22, while Bernanke will testify that day on the economic outlook.

"The market will be focused on Bernanke speaking on Wednesday," said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. "There’s a lot of chatter about tapering and QE, so people will be listening if Bernanke gives any hints on that."

U.S. 10-year yields fell two basis points, or 0.02 percentage point, to 1.93 percent as of 9:39 a.m. New York time, after climbing five basis points last week. The yield touched 1.98 percent on May 15, the highest since March 15. The price of the 1.75 percent note due in May 2023 added 5/32, or $1.56 per $1,000 face amount, to 98 11/32.

 

Relative Value

 

While 10-year yields rose last week, they are 60 basis points higher than similar-maturity German bunds. That’s about double the average since 2003. The U.S. rate is five basis points more than that on U.K. gilts, versus an average of about 30 basis points below during the same period.

"The Treasury market is cheaper than almost any other comparable market on a relative value basis," Jim Vogel, an interest-rate strategist at Memphis, Tennessee-based FTN Financial, said by phone May 15. "There is the thought out there that Treasuries are expensive when in reality they offer the most value."

Treasuries have handed investors a loss of 1.1 percent this month, according to Merrill Lynch bond indexes. German bunds have lost 0.6 percent, the indexes show.

Investors reversed to a net-short position from a net long in U.S. 10-year note futures in the week ended May 17, the first time since the period ended March 22 that they are betting prices will fall, according to U.S. Commodity Futures Trading Commission data. Speculative short positions outnumbered longs by 11,153 contracts on the Chicago Board of Trade. The previous week, traders were net-long 37,956 contracts.

 

Fed Buys

 

The Fed purchases $85 billion of Treasury and mortgage debt a month, and is scheduled to buy as much as $1.75 billion of securities maturing between February 2036 and May 2043 today.

"The Fed is likely to show patience and would want to wait till the outlook for labor market and inflation improves before tapering," Barclays Plc strategists Rahul Bajoria and Anshul Pradhan wrote in a note to clients today. "The market is being too aggressive in pricing in the end" of stimulus, wrote the strategists at Barclays, one of 21 primary dealers that trade directly with the Fed.

Chicago Fed President Charles Evans speaks today on economic conditions and monetary policy. The Federal Open Market Committee’s next policy meeting is on June 18-19.

The difference between yields on 10-year notes and similar- maturity TIPS shrank to 2.24 percentage points, at almost the 2.23 percentage points reached May 17, the least since Aug. 9, according to Bloomberg data. The consumer price index decreased 0.4 percent, the biggest decline since December 2008, after falling 0.2 percent in March, according to Labor Department figures released last week.

Volatility rose last week to the highest level since March. Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries increased to 61.33 basis points on May 17, the highest level since March 22. The index fell to an all-time low of 48.87 basis points on May 9. The measure averaged 62.5 basis points during the past 12 months.

Existing home sales increased 1.4 percent in April after a 0.6 percent decline the previous month, according to the median estimate in a Bloomberg survey of economists before a May 22 report from the National Association of Realtors.

 

--With assistance from Cordell Eddings in New York. Editors: Paul Cox, Greg Storey

 

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

 

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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