Treasury yields fall from 2-year high amid speculation on taper

Source: Bloomberg Source: Bloomberg

Treasury 10-year yields (CBOT:ZNH14) dropped from the highest level in more than two years as investors speculated whether the U.S. economy will improve enough for the Federal Reserve to end bond purchases in 2014.

U.S. government securities lost 3.4% in 2013, the first annual decline since a record 3.7% slide in 2009, Bank of America Merrill Lynch data show. Yields fell today as U.S. stocks dropped and jobless claims declined before data next week forecast to show U.S. payrolls gains continued. Yields stayed lower as an Institute for Supply Management manufacturing index slipped. The U.S. Northeast braced for a winter storm.

“The only thing that could cause a paradigm shift in expectations for the economy would be a disastrous employment report next Friday,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Between ISM, the fact that there’s no data tomorrow and the looming blizzard, any drama in the Treasury market will not occur this week.”

Ten-year yields dropped four basis points, or 0.04 percentage point, to 2.99% at 11:49 a.m. New York time after climbing earlier to 3.05%, the highest since July 2011. The price of the benchmark 2.75% security maturing in November 2023 increased 11/32, or $3.44 per $1,000 face amount, to 98.

Ten-year yields jumped 1.27 percentage points in 2013. They averaged 3.49% in the past decade.

Long Bonds

Thirty-year bond yields (CBOT:ZBH14) fell four basis points to 3.92% after reaching 3.97%, the highest level since August 2011.

Yields declined as the Standard & Poor’s 500 Index sank 0.7% after recording the best year since 1997.

“It’s a little bit of noise as the market gets under way in the new year,” said CRT’s Lyngen.

The Treasury said it will sell $64 billion of notes and bonds next week in three daily auctions beginning Jan. 7. It will offer $30 billion of three-year debt, $21 billion of 10- year securities and $13 billion of 30-year bonds.

A gauge of Treasury volatility rose to a three-week high on Dec. 31, the latest available figure. The Bank of America Merrill Lynch MOVE Index reached 73.55, the highest since Dec. 5, after touching a six-month low of 58.31 on Nov. 18. The 2013 average was 71.35.

Volume has declined over the Christmas and New Year’s holiday weeks. Daily trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, slid to $72.7 billion on Dec. 26, less than one-quarter the 2013 average of $308 billion. It was $166.6 billion on Dec. 31.

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