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Treasury Yield Hits Seven-Month High

Thursday, 16 Dec 2010 12:08 PM

Treasury 10-year note yields touched a seven-month high as evidence the U.S. economy is recovering reduced demand for safety.

“It’s a snowball effect in Treasuries as we are seeing flow-driven trades that have been exacerbated by the improving economic data,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist at Morgan Stanley Smith Barney.

Yields rose earlier as reports showed Philadelphia area manufacturing beat forecasts, initial jobless claims unexpectedly fell and housing starts increased for the first time in three months. Yields pared gains as Moody’s Investors Service said it placed Greece’s Ba1 local and foreign currency government bond ratings on review for possible downgrade.

The yield on the 10-year note dropped less than one basis point, or 0.01 percentage point, to 3.53 percent at 11:54 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 rose 2/32, or 63 cents per $1,000 face amount, to 92 1/2. The yield touched 3.56 percent, the highest level since May 13, after earlier falling to an intraday low of 3.46 percent.

Bank of America Merrill Lynch’s MOVE index, which measures volatility in Treasuries based on prices of over-the-counter options maturing in 2 to 30 years, rose yesterday to 125.20, the highest level since September 2009.

The Fed said following its Dec. 14 meeting that the recovery “is continuing, though at a rate that has been insufficient to bring down unemployment.” Policy makers maintained a $600 billion program of debt purchases.

Fed Debt Buying

Primary dealers submitted today $22.084 billion of debt maturing from June 2013 to November 2014 for possible purchase by the central bank, compared with $13.114 billion in debt maturing from December 2014 to May 2016 yesterday. The Fed bought $6.780 billion of debt today and yesterday, part of $105 billion in purchases over the next month.

The difference in yield between 10-year Treasury Inflation Protected Securities and comparable conventional notes showed money managers expect the consumer price index to increase an average of 2.32 percent a year in the next decade. The spread indicated an inflation rate of 1.47 percent on Aug. 25.

The Philadelphia Fed reported its general economic index, a gauge of regional manufacturing, increased to 24.3 this month, from 22.5 in November. The median forecast of 59 economists was for a drop to 15. A reading greater than zero signals expansion in eastern Pennsylvania, southern New Jersey and Delaware.

Jobless Claims

First-time claims for unemployment insurance fell to 420,000 during the week ended Dec. 11, from a revised 423,000 in the prior period, the Labor Department reported. The median forecast of 48 economists in a Bloomberg News survey was for an increase to 425,000 from a previously reported 421,000.

Housing starts advanced 3.9 percent to a 555,000 annual rate in November after a drop of 11.1 percent in the prior month and a decrease of 2.1 percent in September, the Commerce Department reported.

“We will take this data package as a little bearish for Treasuries,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of the 18 primary dealers that deal directly with the Fed. “The claims data confirms the basic trend in improving jobs data.”

IntercontinentalExchange Inc.’s Dollar Index, used to track the greenback against the currencies of six major U.S. trading partners, has gained 0.8 percent since Dec. 6 as the Treasury 10-year note yield increased more than 60 basis points.

U.S. debt rose earlier today as demand fell at Spain’s debt sale a day after Moody’s Investors Service said it may cut the nation’s credit rating.

Spain’s Auction

Spain’s 10-year securities attracted bids equivalent to 1.67 times the amount on offer, compared with 1.84 at the last auction Nov. 18. Moody’s said yesterday it put Spain’s Aa1 debt rating on review for a possible downgrade.

European Union leaders meet in Brussels today to discuss a permanent crisis-fighting system. German Chancellor Angela Merkel has ruled out an increase in the region’s emergency fund.

“There are still worries coming out of Europe that are lingering that are still supportive of the Treasury market,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors. “ The market will trade volatile and illiquid into the end of the year as people wind down their positions. The action should be very choppy.”

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Treasury 10-year note yields touched a seven-month high as evidence the U.S. economy is recovering reduced demand for safety. It s a snowball effect in Treasuries as we are seeing flow-driven trades that have been exacerbated by the improving economic data, said Kevin...
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