Tags: Investors | Treasurys | Data | Fed

Investors Unload Treasurys as Data Raise Fed Fears

Monday, 02 December 2013 04:09 PM

The price of Treasury 10-year notes fell for a third day Monday — the longest stretch in a month — as an unexpected increase in a manufacturing gauge added to bets the U.S. economy is improving and the Federal Reserve will soon cut stimulus.

U.S. government securities extended losses following the first monthly drop since August as the Institute for Supply Management’s factory index gained at the fastest pace in more than two years. Labor Department data due Friday is forecast to show U.S. nonfarm payrolls swelled last month. Central-bank policy makers may decide at a Dec. 17-18 meeting when to begin reducing $85 billion a month in bond purchases.

“Today’s story is largely about ISM — the components were strong, all of which bode well for Friday’s NFP report,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We continue to expect the market will be largely range-bound between now and the end of the year. We are open to a bit of a sell-off on a strong employment report that could get yields as high as 2.90 percent.”

The benchmark 10-year yield rose five basis points, or 0.05 percentage point, to 2.8 percent at 2:57 p.m. New York time, according to Bloomberg Bond Trader prices. The yield, which climbed 19 basis points in November, touched 2.81 percent earlier, the highest since Nov. 21. The price of the 2.75 percent note due in November 2023 fell 14/32, or $4.38 per $1,000 face amount, to 99 19/32. The three-day decline is the longest since Nov. 1.

The median forecast in a Bloomberg survey of 65 economists is for U.S. 10-year notes to yield 2.75 percent at year-end. The Bloomberg U.S. Treasury Bond Index has lost 2.3 percent in 2013.

Relative Strength

The 14-day relative strength index for the 10-year yield was at 61 Monday, compared with 56 on Nov. 29, according to data compiled by Bloomberg. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.

The Treasury Department said the non-competitive and competitive portion of the 13- and 26-week bill auctions originally scheduled to close Monday will instead close tomorrow. In a statement released in Washington, it said an error that occurred during a test of the auction system forced the rescheduling.

The department will announce on Dec.5 the amount it will sell next week in three-, 10- and 30-year debt.

The ISM’s manufacturing purchasing-manager index increased to 57.3 in November, the highest level since April 2011, from 56.4 a month earlier, the Tempe, Arizona-based group said. Economists in a Bloomberg survey forecast a decline to 55.1. Manufacturing accounts for about 12 percent of the economy.

‘Surprising Strength’

“The ISM index showed surprising strength for November,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed income assets. “Treasurys are looking a little bit weaker after the data. We’ll hold below 3 percent through the end of this year” on 10-year yields.

U.S. employers added 181,000 workers in November after increasing payrolls by 204,000 in October, a Bloomberg survey forecast before the Labor Department data this week.

Retail sales rose in October by the most in three months, increasing 0.4 percent, the Commerce Department said Nov. 20. Building permits climbed to the highest level in more than five years, Commerce Department data showed on Nov. 26, signaling the U.S. residential real-estate market will strengthen in 2014.

‘Beat Expectations’

“We’re seeing economic data beat expectations,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “This week we’ll see if it’s sustainable. People are building in expectations that Fed taper will come sooner than later.”

Treasury 10-year yields climbed to this year’s high of 3 percent in September before the Fed unexpectedly refrained that month from changing stimulus, saying it wanted more evidence of improvement in the world’s largest economy.

While the central bank has maintained its target rate for overnight loans between banks at zero to 0.25 percent since 2008, it has signaled its intention to reduce monthly purchases of Treasurys and mortgage-backed debt.

Minutes from the Federal Open Market Committee meeting on Oct. 29-30, released Nov. 20, showed policy makers expected economic data to signal ongoing improvement in the labor market and “warrant trimming the pace of purchases in coming months.”

Fed Purchase

The Fed bought $1.48 billion Monday in Treasurys maturing between May 2038 and May 2043 as part of the program to lower borrowing costs.

As the central bank contemplates slowing the pace of its buying, data shows inflation in the U.S. remains low, lessening pressure on the central bank to act.

U.S. consumer prices rose 1 percent in October from a year earlier, the smallest increase since 2009, the Labor Department said on Nov. 20.

Five-year inflation swaps declined to 2.08 percent at the end of last week, the lowest since June 26 based on closing prices. The figure was 2.1 percent Monday, versus a 2012 average of 2.29. The contracts allow investors to exchange fixed interest rates for returns equivalent to the consumer price index, and are a gauge of trader expectations for costs.

Never before have America’s banks been so wary of risking their cash deposits on U.S. government securities.

After holdings of U.S. debt surged to a record $1.89 trillion in 2012, lenders from Citigroup Inc. to Bank of America Corp. and Wells Fargo & Co. are culling for the first time in six years and amassing dollars. Banks’ $1.8 trillion of the bonds now equal less than 70 percent of their cash, the least since the Fed began compiling the data in 1973.

“Banks reluctant to lend were large holders of Treasurys,” Jeffrey Klingelhofer, a money manager at Thornburg Investment Management Inc., which oversees $89 billion, said in a telephone interview from Santa Fe, New Mexico. “Like a lot of other people who have been moving out of fixed income, it’s largely to avoid the fallout from tapering.”

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The price of Treasury 10-year notes fell for a third day Monday - the longest stretch in a month - as an unexpected increase in a manufacturing gauge added to bets the U.S. economy is improving and the Federal Reserve will soon cut stimulus.
Monday, 02 December 2013 04:09 PM
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