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

September 4, 2013 10:15 AM

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.

The fund had $7.7 billion in net redemptions in August, according to researcher Morningstar Inc. Over the past four months, investors redeemed $26.4 billion. The fund lost 3.9 percent this year, trailing 86 percent of peers.

Pimco Total Return had $251.1 billion in assets as of Aug. 30, according to data compiled by Bloomberg.


Treasury Losses


U.S. government debt is on track to deliver a 3.6 percent loss this year, which would be the biggest annual decline since 2009, according to Bank of America Merrill Lynch indexes.

Treasury 10-year rates will end the year at 2.78 percent and rise to 3.06 percent by mid-2014, according to the weighted average of analysts’ predictions compiled by Bloomberg.

"The market is preparing itself for tapering," said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. "People are waiting to see the Fed policy before they actually come back into the market and buy. Until the uncertainty is removed, it will be difficult for people to come back."

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index rose to 105.78 yesterday, the highest since July 8.

Treasuries fell the most in almost two weeks yesterday as a gauge of U.S. manufacturing rose more than forecast in August.

The Institute for Supply Management’s factory index climbed to 55.7, a two-year high, from the prior month’s 55.4, the Tempe, Arizona-based group’s report showed yesterday. A reading of 50 is the dividing line between expansion and contraction.

The 14-day relative strength index for the Treasury 10-year yield rose to 61.4, approaching the 70 level that some traders see as a sign a market measure has risen too fast and may be due to reverse course.


--With assistance from Charles Stein in Boston. Editors: Kenneth Pringle, Paul Cox


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

Back to news



Spell Check

No comments have been posted to this News Article

Corn College TV Education Series


Get nearly 8 hours of educational video with Farm Journal's top agronomists. Produced in the field and neatly organized by topic, from spring prep to post-harvest. Order now!


Market Data provided by QTInfo.com
Brought to you by Beyer