Treasuries Drop as Yellen Sees Further Cuts to Fed Bond-Buying

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10248702_h19685109Treasury 10-year notes fell for the first time in three days as Federal Reserve Chairman Janet Yellen said reductions in the central bank’s bond purchases will probably continue even amid uneven employment growth.

Yields on 30-year bonds reached the highest level this month as Yellen told a congressional panel she’ll maintain her predecessor’s policies to ensure a return to full employment and stable prices. Bill rates fell as House Speaker John Boehner said his chamber will vote tomorrow on raising the U.S. debt limit without conditions. The U.S. will auction $70 billion of notes and bonds this week starting with $30 billion of three-year debt today.

“We’re getting a bit of a selloff here as she maintains the pace of tapering,” said Christopher Sullivan, who oversees $2.25 billion as chief investment officer at United Nations Federal Credit Union in New York. “We’re going to be on a scheduled tapering that will proceed as long as the economic data is supportive of it. Yields should rise as long as the recovery remains on track.”

The 10-year yield climbed five basis points, or 0.05 percentage point, to 2.72 percent at 11:37 a.m. in New York, according to Bloomberg Bond Trader prices. It touched a three-month low of 2.57 percent on Feb. 3 after reaching 3.05 percent on Jan. 2, the highest level since July 2011. The price of the 2.75 percent security due in November 2023 dropped 13/32, or $4.06 per $1,000 face amount, to 100 9/32.

Thirty-year (USGG30YR) bond yields rose three basis points to 3.68 percent and touched 3.69 percent, the highest since Jan. 29.

Bill Rates

Rates on bills maturing Feb. 27, the day the Treasury Department said extraordinary measures to keep within the debt limit may run out, touched negative 0.035 percent after climbing on Feb. 4 to 0.135 percent, matching the highest level since the securities were issued in August. Rates on bills due March 6 dropped to 0.03 percent, after surging Feb. 4 to 0.135 percent, the highest level since March.

An accord suspending the nation’s debt ceiling expired Feb. 7. President Barack Obama and congressional Democrats have said for months a debt-ceiling increase must not be combined with any other policy measures. Rates on bills climbed earlier this month amid concern there would be a showdown between Republicans and Democrats on extending the limit. Boehner said Democrats will need to back the measure, which he predicted will have minimal Republican support.

Yields rose as Yellen, who was sworn in as Fed chief on Feb. 3, delivered her first semi-annual report on monetary policy and the nation’s economic outlook to the House Financial Services Committee. She testifies to the Senate Banking Committee on Feb. 13.

Fed ‘Continuity’

The former Fed vice chairman said she expects “a great deal of continuity” in the Fed’s approach to monetary policy. She said she served on the Federal Open Market Committee “as we formulated our current policy strategy and I strongly support that strategy.”

“The market was hoping for a little more of a dovish assessment from Yellen,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “Unless something changes in a meaningful way, they’re probably going to taper $10 billion a meeting and be done with it, and then the conversation moves to the first rate hike.”

Policy makers have held the benchmark interest rate at zero to 0.25 percent since 2008 to support the economy. The Fed reduced its monthly bond purchases to $65 billion from $85 billion during its last two meetings, citing signs the labor market is recovering. The debt-purchase program is designed to cap long-term borrowing costs and encourage growth.

Employment Data

U.S. non-farm payrolls increased at a slower pace in December and January than economists forecast, according to Labor Department data. At the same time, the jobless rate dropped to 6.6 percent last month, the lowest since October 2008, the Feb. 7 report showed.

Fed Bank of Philadelphia President Charles Plosser said “a good case can be made for” accelerating bond-purchase cuts if the economy improves further. He spoke in Newark, Delaware, in a speech similar to one he gave Feb. 5 in Rochester, New York.

Yellen said that, while growth has picked up, “the recovery in the labor market is far from complete.” She said she’s committed to achieving both parts of the Fed’s mandate: helping the economy return to full employment and returning inflation to 2 percent.

“It was a little less dovish than people may have been thinking, and she’s going to carry on the tapering,” said Dan Mulholland in New York, head of Treasury trading at BNY Mellon Capital Markets. “I don’t think anything’s really changed.”

Note Auction

The three-year notes being sold today yielded 0.710 percent in pre-auction trading, compared with 0.799 percent at the previous auction of the securities on Jan. 7.

Investors bid for 3.25 times the amount of debt offered last month, down from 3.55 times in December. The average ratio for the past 10 auctions was 3.27.

Indirect bidders, an investor class that includes foreign central banks, purchased 28 percent of the notes sold, the lowest level since April, versus an average of 32.7 percent at the past 10 auctions.

The size of today’s offering is the same as the sales in the past four months and matches the lowest since January 2009.

The Treasury is scheduled to auction $24 billion of 10-year notes tomorrow and $16 billion of 30-year bonds on Feb. 13.

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