Treasury 10-year yields fall amid Fed purchase, housing sales

March 21 (Bloomberg) -- Treasuries rose, pushing 10-year note yields down for a second straight day, as sales of previously owned homes stayed near the highest since May and the central bank bought $4.03 billion in U.S. debt.

Yields touched the highest level since October yesterday on reduced speculation that the Federal Reserve will announce another round of bond purchases. They rose today as mortgage applications in the U.S. decreased.

“There are still Fed purchases this week and the sharp selloff has stopped and we are seeing investors start to take advantage of the higher rates,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the Fed. “People have been stepping back into the market gradually, and now that rates have stabilized it’s enough of a reason for buyers to feel comfortable.”

Yields on 10-year notes dropped five basis points, or 0.05 percentage point, to 2.31% at 11:13 a.m. New York time, according to Bloomberg Bond Trader prices. The 2% securities maturing in February 2022 rose 3/8, or $3.75 per $1,000 face amount, to 97 7/32. The yields touched 2.40% yesterday, the highest level since Oct. 28. They have gained more than 40 basis points this year.

Thirty-year yields fell five basis points to 3.4%.

The 14-day relative strength index for 10-year note yields was 68.8 today after exceeding 70 for five straight days. A reading above that level indicates to some traders that a gain in the yields may be hard to sustain.

‘See a Moderation’

“We have had quite a big decline in Treasuries over the past few weeks, and now we see a moderation,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich.

While 10-year note yields have climbed from the record low 1.67% set Sept. 23, they’re still below the average of 3.87% over the past decade. The yields may advance to as high as 2.60% in the coming weeks, Purps said. That level was last reached in August.

The Fed purchased Treasuries today maturing from April 2018 to February 2020 as part of the program to swap $400 billion of shorter-maturity Treasuries in its holdings with longer-term bonds to cap borrowing costs. It is buying U.S. debt every day this week.

The central bank increased its assessment of the U.S. economy following its March 13 meeting while reiterating its pledge to keep its target lending rate at virtually zero through at least late 2014.

Bernanke Testimony

Fed Chairman Ben S. Bernanke said in testimony today to the House Committee on Oversight and Government Reform that Europe must further strengthen banks and that its financial and economic situation “remains difficult” even as stresses have lessened.

U.S. purchases of previously owned homes last month declined 0.9% to a 4.59 million annual rate from a revised 4.63 million pace in January that was faster than previously estimated, a report from National Association of Realtors showed today in Washington. The median forecast in a Bloomberg News survey called for a rise to 4.61 million. January’s 4.63 million revised total was the most since May.

Mortgage applications in the U.S. fell last week, reflecting the biggest slump in refinancing since November. The Mortgage Bankers Association’s index declined 7.4% in the period ended March 16 from the prior week, the Washington-based trade group reported today. The refinance index decreased 9.3%, while the purchases gauge fell 1%.

Volatility Rose

Refinancing of mortgages slowed as borrowing costs rose. The average rate on a 30-year, fixed-rate loan was 4.19%, the highest since late November. In early February, the rate fell to 4.05%, the lowest since data began in 1990. The average rate on a 15-year mortgage climbed to 3.47% from 3.36%.

Treasury-market volatility climbed yesterday to the highest level this year. Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options, rose to 93.3 basis points, the most since Dec. 29, after touching 69.9 basis points on March 12, the lowest since July 2007. The average over the past year is 90 basis points.

Volume declined yesterday, with about $284 billion of Treasuries changing hands through ICAP Plc, the world’s largest interdealer broker. It rose to $303 billion the previous day. Volume reached $439 billion on March 14, the highest since August. The average daily volume over the past year is $267 billion.

Goldman Sachs Group Inc. reiterated yesterday in a report that investors should bet against 10-year Treasury futures. The bank, one of the 21 primary dealers that underwrite the U.S. debt, initiated the recommendation on March 14 at a price of 129 17/32 with a target of 126.

Ten-year futures contracts for June delivery gained 12/32 to 128 12/32. They reached 127 23/32 yesterday, the least since October.

Bloomberg News

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