The level of “2.5% is psychologically significant, and 2.52% is technically significant,” Lyngen said. “If we are holding that level, it’s constructive for the market and we should consolidate in this new yield range of 2.3% to 2.5%. If we break the range, we could rise as high as 2.75%.”
The so-called term premium on Treasury 10-year notes rose to 0.23%, the highest since July 2011, according to a Columbia Management Investment Advisers LLC model. It turned positive this week for the first time since October 2011. The premium reached an all-time low of minus 0.64% last July.
Bernanke, speaking this week after a two-day meeting of the Federal Open Market Committee, said reducing bond purchases would depend on the economy achieving the central bank’s objectives. Policy makers are forecasting growth of as much as 2.6% this year and 3.5% in 2014.
The Fed has been buying $45 billion of U.S. government debt and $40 billion of mortgage securities each month to put downward pressure on borrowing costs in its third round of asset purchases. It purchased $1.5 billion today of Treasuries due from February 2036 to May 2042.
The Fed will cut its monthly bond purchases to $65 billion at its Sept. 17-18 policy meeting, according to 44% of 54 economists surveyed by Bloomberg after Bernanke’s June 19 press conference. In a June 4-5 survey, only 27% forecast tapering would start in September.
The central bank left unchanged its statement that it plans to hold its target interest rate at almost zero, where it’s been since 2008, as long as unemployment remains above 6.5% and the outlook for inflation doesn’t exceed 2.5%. Bernanke said a rate increase is still “far in the future.”
Fed-funds futures showed a 54% probability policy makers will raise the benchmark interest rate by December 2014, versus 14% at the start of May.
The gap between yields on 10-year notes and Treasury Inflation-Protected Securities of comparable maturity narrowed to 1.95 percentage points, the least since January 2012. The difference, known as the 10-year break-even rate, represents the bond market’s expectations for the rate of growth in consumer prices during the life of the debt.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index climbed to 96.02 yesterday, the most recent available data. It was the highest level since December 2011. The daily average this year is 60.8.
“People are re-evaluating what is going on here,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the Fed. “They’re going to start increasing short-term interest rates in the second half of 2014.”
Trading volume has been rising, with the amount changing hands through ICAP Plc, the largest inter-dealer broker of U.S. government debt, averaging $403 billion a day since the start of May. That’s up from an average of $281 billion in the first four months of the year. Volume climbed to $569 billion yesterday, the highest since May 31.
German 10-year bund yields climbed to 1.74%, the highest level since April 2012. The dollar rose against 11 of its 16 most-traded counterparts.
The Treasury will auction $35 billion in two-year notes on June 25, an equal amount of five-year debt the following day and $29 billion in seven-year securities on June 27.