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Treasury 10-Year Yield Rise Is Most Since April

Sunday, 12 September 2010 12:06 PM

Last week's decline in prices of U.S. Treasury securities pushed the 10-year note yield up the most in five months, as evidence that the U.S. economy is avoiding another recession eased demand for the relative safety of government debt.

The benchmark note’s yield rose to the highest level in a month before a report forecast to show U.S. retail sales increased. The yield on longer-term debt advanced for a third week as primary dealers ended up with the highest share in a government auction of 30-year bonds in 11 months.

“The economy is meandering along, but we have probably avoided a double dip, so a lot of people who owned fixed-income may think they don’t need as big a hedge now,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG, one of the 18 primary dealers that trade with the Federal Reserve. “There has been an asset-allocation shift away from Treasuries.”

The yield on the 10-year note gained 10 basis points, or 0.10 percentage point, to 2.79 percent, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 dropped 26/32, or $8.13 per $1,000 face amount, to 98 17/32.

The 2-year note yield climbed 6 basis points during the week to 0.57 percent after touching the record low of 0.4542 percent on Aug. 24. The 30-year bond yield rose 9 basis points to 3.87 percent.

The gain in the 10-year note yield during the week was the biggest since an increase of 10 basis points during the period ended April 2. The three weeks of advances in the 10-year yield make up the longest stretch of increases since Oct. 23.

The extra yield investors demand to hold 10-year notes over 2-year debt widened for a third day Friday on eased concern the U.S. recovery is stalling. The spread rose to 2.22 percentage points, the highest on a closing basis since Aug. 10.

Treasury 10-year note yields rose sharply Thursday after the Labor Department reported that U.S. initial jobless claims fell more than expected to 451,000 in the week ended Sept. 4 from a revised 478,000 in the prior period.

The yields also rose on Sept. 3 after the Labor Department’s payrolls report showed companies added more jobs last month than economists forecast.

Treasury Volatility

Volatility in the Treasury market rose to almost a three-month high last week. Bank of America-Merrill Lynch’s MOVE index, measuring price swings based on over-the-counter options maturing in 2 to 30 years, climbed on Sept. 9 to 104.90. It reached 110.10 on Sept. 1, the highest level since June 1.

“Current volatility allows for a buying opportunity,” David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC, wrote in a note to clients.

More than $334 billion of Treasuries changed hands on Thursday through ICAP PLC, the most since the three-month high of $351 billion reached Sept. 1, according to data from the world’s largest inter-dealer broker. The average daily volume over the past three months is $223 billion.

At the $13 billion auction of 30-year bonds on Sept. 9, the primary dealers, which are obligated to participate in U.S. debt sales, bought 55.6 percent of the offering. It was the most since October, when they purchased 57 percent. The bond drew a yield of 3.820 percent, below 4 percent for a second month.

Note Auctions

The Treasury sold $33 billion in three-year notes Tuesday at a record low yield of 0.79 percent and $21 billion in 10-year notes the next day at a yield of 2.670 percent, the lowest since January 2009. The week’s total of $67 billion in note and bond sales was the smallest since July 2009.

U.S. retail sales rose 0.3 percent in August after a 0.4 percent increase in the previous month, according to the median forecast of 64 economists in a Bloomberg News survey. The report from the Commerce Department is due on Tuesday. A separate report three days later from the Labor Department is expected to show consumer prices advanced 0.3 percent in August for a second straight month.

The world’s largest economy will grow an average 2.5 percent in 2011, less than the 2.8 percent projected last month and slower than an estimated 2.7 percent this year, according to the median of 59 forecasts in a separate Bloomberg survey taken early this month. Analysts also expect household purchases will cool and the jobless rate will hold above 9 percent.

“Nerves are on edge whenever the data appear to be tilting quickly in a negative direction,” Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients. “The psychology of what may be a coincidental string of bad news is much more powerful than a string of positive indicators on any series other than payrolls.”

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Last week's decline in prices of U.S. Treasury securities pushed the 10-year note yield up the most in five months, as evidence that the U.S. economy is avoiding another recession eased demand for the relative safety of government debt.The benchmark note s yield rose to the...
Sunday, 12 September 2010 12:06 PM
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