Treasuries dropped, pushing 10-year note yields up the most in almost two months, as concern eased that Japan’s nuclear crisis and Libya’s military conflict will undermine the global economic recovery.
Yields rose this week to a two-week high before next week’s payrolls report as Federal Reserve Bank of Philadelphia President Charles Plosser said an improving economy means policy makers should plan for withdrawing record monetary stimulus. The $11 billion sale of 10-year inflation-indexed debt drew the highest demand in a year on speculation US economic growth is fast enough to push up consumer prices.
“After last week’s panic buying, we’ve seen risk markets recover as geopolitical news seems to be moving off the front page, relieving the flight to quality,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo & Co. in Milwaukee. “The market is saying the global problems will not mean a huge lag on the global economy.”
The benchmark 10-year note yield increased yesterday to 3.46 per cent, the highest level since March 10. The gain in the yield this week was the biggest since it advanced 31 basis points during the five days ended February 4.
Drop in volatility
Volatility in the Treasury market dropped, Bank of America Merrill Lynch’s Move index shows. The gauge fell on March 24 to 90.1, the lowest level since November, from 103.7 a week earlier. The index measures debt price swings based on over-the- counter options maturing in 2 to 30 years.
Next week’s government debt sales and record corporate issuance weighed on demand for Treasuries. The US will sell $35 billion of two-year notes on March 28, the same amount of five-year notes the following day and $29 billion of seven-year notes on March 30.
Corporations offered a weekly record $50.1 billion of corporate bond offerings, according to data compiled by Bloomberg. Sales exceeded the previous record of $48.8 billion set in the period ended January 7.
More From This Section
“The weight of supply is offsetting some of the concerns from overseas as the market looks for appropriate levels,” said Ray Remy, head of fixed income at Daiwa Capital Markets America Inc in New York.
TIPS auction
At the auction of 10-year Treasury Inflation Protected Securities on March 24, investors bid for 2.97 times the amount of debt, the highest level since April 2010. The yield was 0.920 per cent, compared with the average forecast of 0.981 per cent in a Bloomberg survey of 9 of the 20 primary dealers, securities firms obliged to participate in US auctions.
The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, has increased to 2.44 percentage points, from 1.84 percentage points six months ago.
TIPS have returned 1.8 per cent in 2011, compared with a 0.1 per cent loss for Treasuries that don’t carry inflation protection, according to Bank of America Merrill Lynch indexes.
Plosser said yesterday in New York that the central bank should set a pace for selling its mortgage and Treasury holdings in conjunction with raising interest rates. He suggested selling $125 billion for every quarter-percentage-point rise in the key rate to almost eliminate $1.5 trillion in bank reserves.
Fed’s outlook
The US recovery is gaining strength, and “conditions in the labor market appear to be improving gradually,” the central bank said in a statement following its March 15 policy meeting. The Fed has held its target rate for overnight lending between banks at zero to 0.25 percent since December 2008.
The Fed bought $29.4 billion of government debt this week as part of its $600 billion program of quantitative easing to support the economy by keeping borrowing costs low.
Bonds pared gains yesterday after the Commerce Department reported that the US economy expanded at a 3.1 per cent annual rate in the fourth quarter, up from an estimate last month of a 2.8 per cent pace of growth.
US employers added 195,000 jobs in March after an increase of 192,000 positions in the previous month, according to the median forecast of 62 economists in a Bloomberg News survey. The Labor Department’s report on April 1 may show that the unemployment rate stayed at 8.9 per cent.
“The bigger picture for Treasuries is that real economic growth in the US is doing fine, and the Fed seems determined to do everything to keep growth going,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “That means upside risks to yields prevail.”