Treasury yields close to 8-month highs before year’s first sales

Treasury 10-year note yields were at almost an eight-month high in trading before the first auction of the securities this year as investors pondered the outlook for the end of the Federal Reserve’s debt purchases.

Yields on the benchmark securities soared the most since March last week after minutes from the Fed’s last meeting showed policy makers differed over the scope of purchases and several officials thought the Fed should end quantitative easing before year-end. The U.S. is selling $66 billion of notes and bonds this week, including $21 billion in 10-year debt in two days.

“The 10-year is relatively cheap on the curve -- it’s a relative value play,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “People are starting to get a sense that there’s a potential for rates to move higher. We have been at crisis levels for quite some time, with the Fed fueling those flames.”

The benchmark 10-year note yield was little changed at 1.90 percent as of 2:14 p.m. New York time, based on Bloomberg Bond Trader prices. It jumped to 1.97 percent on Jan. 4, the most since April 26. The 1.625 percent note maturing in November 2022 added 1/32, or 31 cents per $1,000 face value, to 97 18/32. The notes yielded 1.91 percent in when-issued trading.

The 30-year bond yielded 3.10 percent after reaching 3.18 percent on Jan. 4, the most since April 25, and yielded 3.11 percent in when-issued trading.

Yield Outlook

The U.S. debt auctions this week begin tomorrow with $32 billion in three-year notes and conclude Jan. 10 with $13 billion in 30-year bonds. The current three-year note yield was little changed at 0.39 percent and at 0.41 percent in when- issued trading.

“The auctions will go well at these levels,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “We’re finding a footing in here. We’ll probably get more of a concession.”

U.S. government securities traded today close to the least expensive levels in eight months. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, touched negative 0.70 percent. It reached 0.68 percent on Jan. 3, the least costly since May.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average last year was negative 0.77 percent.

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