Treasuries Rise as 3% Yield Attracts Demand

Treasuries rose as 10-year yields above 3 percent attracted demand amid an uneven economic recovery and bets the Federal Reserve will maintain its pledge to keep its interest-rate target at record lows.

Benchmark yields dropped from the highest level since July 2011 before reports this week forecast to show U.S. service industries expanded, while employers added fewer jobs. Janet Yellen is poised for confirmation by the Senate today as head of the central bank, which begins reducing its bond-buying program this month and will release minutes of its December policy-makers meeting on Jan. 8. The U.S. will sell $64 billion of Treasuries maturing in three, 10 and 30 years this week.

“The three-percent level in 10s is going to be a key level to breach in a down-trade,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We haven’t sustainably been able to do that. The minutes may have a hawkish spin to them, keeping in mind the Fed decided to taper at this meeting. We might need a bit more of a setup to take down 10s and 30s at this level.”

The benchmark 10-year yield fell two basis points, or 0.02 percentage point, to 2.97 percent at 8:21 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.75 percent note maturing in November 2023 rose 5/32, or $1.56 per $1,000 face amount, to 98 3/32. The yield climbed to 3.05 percent on Jan. 2, the highest level since July 8, 2011.

Bond Returns

U.S. government securities returned 0.1 percent as of Jan. 3, according to indexes compiled by Bank of America Merrill Lynch. They lost 3.4 percent in 2013, the first annual decline since 2009.

“In the last week of last year, Treasury yields were moving up rather rapidly,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, the Netherlands. “We’ve taken a step back because a lot of the good news is already incorporated in market prices. There are still some weak spots despite the strong data that we’ve seen from the U.S.”

The Institute for Supply Management will say today its nonmanufacturing index rose to 54.7 last month from 53.9 in November, which was the lowest since June, according to a Bloomberg survey. Employers added 195,000 workers in December, down from 203,000 the previous month, a separate survey showed before the Labor Department report on Jan. 10.

Officials shouldn’t rush to reduce stimulus, Fed Bank of Boston President Eric Rosengren said on the weekend.

Policy Options

Policy makers “have the opportunity to be patient in removing accommodation” with the inflation rate below 2 percent and unemployment above target, Rosengren said Jan. 4 at the American Economic Association’s annual meeting in Philadelphia. “This was one of the motivations for my dissenting vote,” he said, referring to his decision last month to cast the lone vote against starting tapering.

The Federal Open Market Committee announced on Dec. 18 it would start reducing bond purchases in January to $75 billion a month from $85 billion. The Fed said “it likely will be appropriate to maintain the current target range for the federal funds rate well past” the 6.5 percent unemployment-rate threshold, especially if inflation stays below 2 percent. The benchmark rate has been a range of zero to 0.25 percent since 2008.

The U.S. plans to auction $30 billion in three-year notes tomorrow, $21 billion of 10-year securities the following day and $13 billion in 30-year bonds on Jan. 9.

Securities in the Bank of America Merrill Lynch U.S. Corporate Index yielded 1.27 percentage points on average more than Treasuries as of Jan. 3 based on option-adjusted spreads, the least since July 2007. Corporate bonds handed investors a loss of 1.5 percent last year, as Treasuries tumbled 3.4 percent, Bank of America indexes show.

(Source: Bloomberg)