Treasury 10-year note yields were in the narrowest range in seven weeks as investors weighed whether the U.S. economy was strong enough for the Federal Reserve to reduce bond purchases designed to hold down borrowing costs.
Thirty-year bonds fell after a gauge of New York manufacturing rose. The Fed opens a two-day meeting tomorrow after 10-year yields fell from a 14-month high last week amid skepticism it’s moving toward reducing bond buying. Chairman Ben S. Bernanke said in May the central bank could reduce purchases if there’s sustainable improvement in employment. The Fed has also kept its key interest rate at virtually zero since 2008.
“The market is leaning toward the fact that Bernanke will reinforce that the Fed is not raising rates,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “They are looking forward to what the Fed’s outlook is because people will correlate the Fed’s outlook with when they’re going to taper, if at all.”
The benchmark 10-year note yield rose two basis points, or 0.02 percentage point, to 2.145% at 10:22 a.m. in New York, according to Bloomberg Bond Trader prices. It climbed to 2.29% on June 11, the highest since April 2012. The price of the 1.75% note due in May 2023 declined 1/8, or $1.25 per $1,000 face amount, to 96 1/2.
Ten-year note yields traded in a range of 3.94 basis points today between 2.1475 and 2.1081%, the narrowest since April 29.
Thirty-year yields rose two basis points to 3.33%.
TIPS Sale
The U.S. is scheduled to sell $7 billion in 30-year Treasury Inflation Protected Securities June 20. It auctioned $66 billion in notes and bonds last week.
The difference between yields on 30-year bonds and similar- maturity TIPS was at 2.15 percentage points, according to data compiled by Bloomberg. It touched 2.11 percentage points on June 13, the narrowest since May 2012.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE Index rose to 84.75 on June 6 and June 10, the highest level since June 2012. It ended last week at 78.45.
Trading volume has been increasing, with the amount changing hands through ICAP Plc, the largest inter-dealer broker of U.S. government debt, averaging $393 billion a day since the start of May. That’s up from an average of $279 billion in the first four months of the year. It was $359 billion on June 14.
Ten-year Treasury yields will rise by more than half a percentage point by year-end, according to Societe Generale SA.
On Fence
“Bernanke will have to sit on the fence, and I wouldn’t expect a clear message,” said Patrick Legland, head of research at Societe Generale in Paris, said in an interview on Bloomberg Television’s ‘On the Move’ with Manus Cranny. “We are on the road for 2.75% 10-year yields on Treasuries.”
The International Monetary Fund urged the Fed to carefully manage its exit plan from stimulus to avoid disrupting financial markets. The IMF on June 14 left its U.S. growth forecast for this year at 1.9% and cut its prediction for 2014 to 2.7%, from 3% growth predicted in April.
“Effective communication on the exit strategy and a careful calibration of its timing will be critical for reducing the risk of abrupt and sustained moves in long-term interest rates,” the Washington-based fund said.
The Fed Bank of New York’s general economic index climbed to 7.8 this month, the highest reading since March, from minus 1.4 in May. Readings of greater than zero signal expansion in New York, northern New Jersey and southern Connecticut. The median projection in a Bloomberg survey of 51 economists called for a reading of zero.
Consumer Prices
A report tomorrow is forecast to show the consumer price index increased 1.4% in May from a year earlier, according to economists in a Bloomberg News survey. The central bank’s target is 2%.
The Fed is buying $85 billion of government and mortgage securities a month to spur the economy, and has kept its target for overnight lending between banks at almost zero since December 2008. Through its purchases, it has increased its assets to $3.4 trillion.
The central bank will buy as much as $5.75 billion of Treasuries today due March 2018 to February 2019, according to the New York Fed’s website.
Treasuries lost 1% this year through June 14, according to the Bloomberg U.S. Treasury Bond Index. Japanese government bonds returned 0.4% and German bunds fell 0.7%, separate indexes show.
