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Treasury 10-Year Yield Falls From 3-Week High as Growth Slows

10:12 AM, Nov. 6, 2013  |  Comments
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Susanne Walker

2013 Bloomberg News

Nov. 6 (Bloomberg) - Treasury 10-year note yields fell from almost the highest level in three weeks as Federal Reserve officials highlighted a lack of strength in the U.S. economy before data this week forecast to show expansion slowed.

The difference between the yields on the five-year and 10- year notes widened to the most in more than two years on speculation the Fed may keep the target rate lower for longer when it starts stimulus cuts. Benchmark 10-year debt rose as Fed Bank of San Francisco President John Williams said yesterday recent economic expansion has fallen short of projections, while Richmond Fed President Jeffrey Lacker said he doesn't see a pickup in growth this year.

"You'll get these ebbs and flows as the market digests various sentiments as to the Fed-tapering debate," said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. "The market had initially moved rates higher. We've reached some kind of equilibrium."

The benchmark 10-year yield fell two basis points, or 0.02 percentage point, to 2.65 percent at 10:04 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.5 percent note due in August 2023 rose 6/32, or $1.88 per $1,000 face amount, to 98 23/32. The yield climbed to 2.68 percent yesterday, the highest level since Oct. 16.

Yield Curve

The yield curve measuring the difference between five-year and 10-year notes widened to 1.31 percentage points, the most since August 2011.

"If the Fed reduces the threshold for the unemployment target, they will lock in zero rates for longer," said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "The amount required by an investor to hold that five-year Treasury security will also be lower. Lower rates for longer may eventually spur inflation, which would lead the 10- and 30-year sectors to underperform."

The argument for a lower unemployment goal is supported in papers this week from Fed officials. The level of slack in the economy justifies an accommodative stance and the policy of seeking to drive down the U.S. jobless rate is effective, according to two separate papers by central-bank officials.

The strategy of not raising rates if unemployment is above 6.5 percent has provided effective stimulus, and an even lower threshold could be helpful, wrote William English, head of the Division of Monetary Affairs. A paper by David Wilcox, the research and statistics chief, said slack in the economy argues for loose policy at a time of contained inflation expectations.

Fed Studies

The papers were posted on the International Monetary Fund's website before a conference starting tomorrow in Washington. Senior staff members at the Fed write the briefing materials for Federal Open Market Committee meetings and draft the central bank's policy options.

The Treasury announced it will sell $30 billion in three- year notes, $24 billion in 10-year debt and $16 billion in 30- year bonds on three consecutive days starting Nov. 12. The $70 billion total is down from $72 billion the previous quarter.

The department said Nov. 4 it will borrow about 13 percent more this quarter than it projected three months ago to boost the nation's cash balance on Dec. 31.

Issuance of net marketable debt will be $266 billion in the October-to-December period, compared with $235 billion initially forecast on July 29, the department said in Washington. At the end of December, the Treasury will have $140 billion in cash, versus $80 billion projected before.

Debt Sales

Treasury said it will sell $10 billion to $15 billion of floating-rate notes Jan. 29. The floating-rate note sales would be the first added U.S. government debt security since Treasury Inflation-Protected Securities were introduced in 1997.

Treasuries gained 1.1 percent from Sept. 17 through yesterday, according to Bloomberg World Bond Indexes. That was the day before the Fed unexpectedly refrained from reducing stimulus and said it needed more evidence of lasting improvement in the economy. U.S. government securities have still declined 2.4 percent this year, the indexes show.

"Tapering will happen later than the market is currently expecting and we think it's March with a bias toward a later commencement," said Michael Leister, a senior rates strategist at Commerzbank AG in London. "For the time being, we expect a sideways movement with a downside bias in yields."

The Fed buys $85 billion of bonds each month to put downward pressure on borrowing costs.

Economic Performance

Gross domestic product grew at a 2 percent annual rate in the third quarter after a 2.5 percent pace from the previous period, according to a Bloomberg survey before the Commerce Department report tomorrow. Employers added 120,000 jobs in October, economists predicted before the Labor Department data on Nov. 8. Employment increased 148,000 in September.

"Up until recently, I was thinking we would start seeing more of that self-powered growth in the second half of this year," the San Francisco Fed's Williams said to reporters yesterday. "Unfortunately, that's not really been happening," and "we haven't seen a real pickup."

Lacker told reporters in Charlotte, North Carolina, yesterday his "baseline doesn't have a pickup in growth next year" and he expects just a 2 percent expansion in 2014.

-Editors: Paul Cox, Greg Storey

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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