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Treasuries drop after $21B sale as Fed backs taper views

January 8, 2014 - 9:45pm

NEW YORK — Treasuries fell Wednesday after the Federal Reserve’s policy-meeting minutes added to speculation the central bank will further slow its monetary stimulus and as the U.S. government auctioned $21 billion of 10-year notes.

The benchmark yield rose above 3 percent as the minutes showed officials saw diminishing economic benefits from bond-buying and expressed concern about risks to financial stability. U.S. debt fell earlier after a private report showed jobs growth last month exceeded forecasts and a government report Jan. 10 is projected to find the nation’s unemployment rate stayed at a five-year low.

“There is a broad tendency at the Fed to anticipate better economic data, which is the Fed’s justification for tapering,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas, one of 21 primary dealers that trade with the Fed. “The Fed moved up their real gross-domestic-product projection and that gives some insight into their thinking.”

The current 10-year yield rose five basis points, or 0.05 percentage point, to 2.99 percent, according to Bloomberg Bond Trader data. The 2.75 percent note due in November 2023 fell 13/32, or $4.06 per $1,000 face amount, to 97 31/32. The yield climbed to 3.05 percent on Jan. 2, the highest since July 2011.

Ten-year securities lost 7.8 percent in 2013, the biggest drop since a 9.7 percent slide in 2009, Bank of America Merrill Lynch indexes show.

The securities sold Wednesday drew a yield of 3.009 percent, the highest at auction since May 2011 and compared with the average forecast of 3.004 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers.

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.68, versus an average of 2.70 at the past 10 auctions.

Indirect bidders, a class of investors that includes foreign central banks, bought 46.6 percent of the notes, the most since June. They purchased with 48.9 percent of the securities at the December sale and averaged 42.7 percent at the past 10 offerings.

Direct bidders, nonprimary-dealer investors that place their bids directly with the Treasury, bought 13.6 percent of the notes, versus 10.6 percent at last month’s sale. The average for the past 10 auctions is 19.9 percent.

“We’ll broach the 3 percent level and not look back,” James Collins, an interest-rate strategist in the futures group at Citigroup in Chicago, one of the primary dealers that are required to bid at the auctions, said before the offering. “People are looking for tapering to wrap up some time in the last quarter of this year and have actual rate hikes in early-to mid-2015.”

The auction was the second of three sales this week of U.S. notes and bonds. It sold $30 billion of three-year debt Tuesday at a yield of 0.799 percent. Treasury will offer $13 billion of 30-year bonds Thursday.

“A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue,” the record of the Federal Open Market Committee’s Dec. 17 and 18 meeting showed. Participants also were “concerned about the marginal cost of additional asset purchases arising from risks to financial stability” citing the potential for “excessive risk-taking in the financial sector.”

The committee cut monthly purchases to $75 billion starting in January, from $85 billion, citing improvement in the labor market. Fed officials will gather Jan. 28 and 29 for the next policy meeting.

A gauge of Treasury volatility, the Bank of America Merrill Lynch MOVE index, yesterday rose to 73.78, the highest level since Dec. 5. The 2013 average was 71.44.

The benchmark U.S. yield is higher than 15 of 24 developed countries, according to data compiled by Bloomberg. The next lowest is the United Kingdom at 2.96 percent, while the next highest is Ireland at 3.52 percent.

Treasuries traded at almost the cheapest level in more than two years, based on the term premium, a model that includes expectations for interest rates, growth and inflation. The gauge was at 0.61 percent, after touching 0.63 percent on Dec. 31, the least expensive on a closing basis since May 2011.

The 10-year yield will climb to 3.15 percent by June 30, according to Bloomberg surveys of analysts with the most recent forecasts given the heaviest weighting.


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