Treasuries fell for a second week, the first back-to-back losses in three months, as the Federal Reserve's expansion of a bond-buying program spurred speculation inflation will increase.
Thirty-year yields touched a five-week high after the Federal Open Market Committee announced plans to buy $45 billion of Treasuries a month and took the unprecedented step of linking stimulus measures to unemployment and inflation. Losses were tempered by concern a budget standoff in Washington may push the economy into recession. The U.S. sold $66 billion in notes and bonds, and said it will auction $113 billion of notes next week.
"The Fed's message was one of higher tolerance for inflation, and they are purchasing less on the long end, which has been bearish for bonds," said Gary Pollack, head of fixed- income trading at Deutsche Bank AG's Private Wealth Management unit in New York. "Still, the driving force in the market is the uncertainty around the fiscal cliff, and until that's resolved we won't stray far from the range."
The 30-year bond yield increased five basis points, or 0.05 percentage point, to 2.86 percent this week in New York, according to Bloomberg Bond Trader prices. It touched 2.93 percent on Dec. 13, the highest level since Nov. 2. The price of the 2.75 percent security due in November 2042 sank 1 2/32, or $10.63 per $1,000 face amount, to 97 23/32. The last time it fell two consecutive weeks was in September.
The yield on the benchmark 10-year note climbed eight basis points to 1.7 percent.
Treasuries rose yesterday for the first time in four days, paring weekly losses, after the Labor Department said the consumer price index fell 0.3 percent in the first drop since May. A Bloomberg survey of economists had projected a 0.2 percent decline.
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, called the 10-year break-even rate, touched 2.51 percentage points on Dec. 12, the widest since Nov. 7, before narrowing to 2.44 percentage points yesterday. The gap signals traders' expectations for consumer prices over the life of the securities.
Volatility was at almost the lowest this week in more than 24 years. Bank of America Merrill Lynch's MOVE index, which measures price swings of U.S. government securities based on options, fell to 51.6 basis points Dec. 11 and rose no higher than 55.1 on Dec. 13. It was 51 basis points Dec. 3, the lowest on record going back to April 1988. The 2012 average is 70.4.
The Fed's move to buy more securities, announced on Dec. 12 after a two-day meeting, will follow the expiration at year-end of Operation Twist, a $667 billion program in which the central bank has swapped each month about $45 billion in short-term Treasuries in its holdings for an equal amount of long-term debt. The program kept the total size of the balance sheet unchanged, while the new purchases will expand it.
The central bank already is purchasing $40 billion of mortgage bonds each month to spur the economy.
"The Fed is going to be as accommodative as they can until growth comes," Jay Mueller, who manages about $2 billion of bonds at Wells Capital Management in Milwaukee, said on Dec. 12. "They are shoving people into taking riskier bets on the investment side, and they have been successful at it. How much they have affected the real economy is always a question."
Fed policy makers also said interest rates will stay low "at least as long" as the jobless rate remains above 6.5 percent and projected inflation "between one and two years ahead" is at no more than 2.5 percent. A majority of the officials forecast unemployment won't fall to between 6 percent and 6.6 percent until 2015, roughly matching their previous estimate of when the benchmark interest rate might rise.
Treasury yields have fallen since the Nov. 6 election amid concern U.S. lawmakers won't resolve the federal budget stalemate by year-end. If they can't reach an agreement, more than $600 billion in automatic spending cuts and tax boosts will start Jan. 1. Going over the fiscal cliff would cause the world's biggest economy to contract 0.5 percent next year, according to the Congressional Budget Office.
President Barack Obama and House Speaker John Boehner met Dec. 13 for a third time at the White House to discuss averting the spending cuts and tax boosts. No progress was announced.
"There are some people questioning the value of sub-3 percent 30-year yields," Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors, said that day. "Still, until we get a better idea about the economy and the fiscal cliff, the market is going to stay relatively well bid."
The Treasury sold $66 billion in notes and bonds this week. A sale of $13 billion in 30-year debt yielded 2.917 percent, the highest level since May, while $32 billion in three-year notes drew a record-low auction yield of 0.327 percent. The U.S. sold $21 billion of 10-year securities at a yield of 1.652 percent, the least since July.
Next week, the government will sell $35 billion in two-year debt, an equal amount of five-year securities, $29 billion in seven-year notes and $14 billion in five-year Treasury Inflation Protected Securities. The auctions will be on four consecutive days beginning Dec. 17.
--Courtesy of bloomberg.com