Treasury yields climb to five-week high on economic gain view

Treasuries fell, with 10-year note yields climbing to the highest level in five weeks, as signs the U.S. economy is improving amid central-bank monetary stimulus sapped demand for U.S. debt.

Benchmark yields were set for their biggest weekly increase in two months. The Fed and other central banks are pumping cash into their economies or cutting interest rates, prompting money managers to seek higher-yielding assets. Volatility in the Treasuries market reached a record low yesterday.

“Treasuries remain cheaper because of the risk-on sentiment,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “All the rate cuts are supposed to suppress volatility. The move is so tied to central bank policy that it is supposed to be low.”

The U.S. 10-year yield climbed four basis points, or 0.04 percentage point, to 1.85% at 9:53 a.m. in New York, after touching 1.87%, the highest since April 3, according to Bloomberg Bond Trader prices. The 1.75% note due in May 2023 fell 3/8, or $3.75 per $1,000 face amount, to 99 2/32.

The yield has climbed 11 basis points this week, the most since the period ended March 8.

Fed Buys

The central bank will buy as much as $1.75 billion of Treasuries maturing between February 2036 and February 2043 today, according to the Fed Bank of New York’s website.

Fed purchases have suppressed volatility. Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries fell to an all-time low of 48.87 basis points yesterday. The measure averaged 62.6 during the past 12 months.

Treasuries due in a decade or more are close to the cheapest levels in a month relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on Treasuries was 49 basis points higher than those in an index of other sovereign debt yesterday, just below the 52 basis points reached on May 6, the cheapest level since April 4. As recently as March 25, the gap was at 57 basis points, the cheapest level since August 2011.

Government bonds in Japan, Germany and the U.K. slumped and the yen weakened beyond 100 per dollar for the first time in four years. The yen depreciated as much as 1.2% to 101.74 per dollar, the weakest since October 2008.

Unwind Time

“The time is right for some of these safe-haven markets to see some unwinding,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “There was a huge move in Japanese government bonds and also in stocks and the dollar-yen. Yields are going to push higher in coming months as there isn’t that sense of urgency that pushed them toward record lows.”

Domestic investors in Japan became buyers of bonds outside the nation after the longest period of sales in three years.

Money managers boosted their holdings of overseas bonds and notes by 514.3 billion yen in the two weeks ended May 3, the Ministry of Finance said today. They had cut them in the six weeks through April 19, the longest run since January 2010.

The U.S. central bank is buying Treasuries and mortgage debt each month to support the economy by capping borrowing costs. The Bank of Japan is purchasing more than 7 trillion yen ($70 billion) of debt each month in expanded easing measures announced April 4.

Treasuries slid 0.5% this month through yesterday, Bank of America Merrill Lynch data show. The Standard & Poor’s 500 Index of U.S. shares returned 1.9% in the same period and climbed to a record yesterday, though dropping by the end of the session. European stocks gained for a fourth day, with the Stoxx Europe 600 Index reaching its highest level since June 2008.

The number of Americans filing claims for jobless benefits unexpectedly dropped last week and the average over the past month fell to the lowest level since before the last recession, the Labor Department said yesterday.

The U.S. sold $72 billion in notes and bonds this week, including $32 billion in three year notes, $24 billion in 10- year securities and $16 billion in 30-year bonds.

Bloomberg News

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