By Dow Jones Business News,
December 20, 2013, 04:17:00 PM EDT
--Benchmark 10-year note's price breaks two-day selling
--Ten-year yield near 3% attracts buyers
--Traders unwind yield-curve trade by selling five-year notes, buying 10-year, 30-year bonds
--Bond market volatility signals concerns over Fed's pace of removing stimulus
By Min Zeng
U.S. Treasury bonds rallied Friday, breaking a two-day losing streak, as buyers stepped in after the benchmark 10-year
note's yield hit a fresh three-month high near 3%.
In late-afternoon trade, the benchmark 10-year note was 11/32 higher in price, yielding 2.885%, according to Tradeweb.
Bond prices rise when their yields fall. For the week, the note's yield rose by 0.018 percentage point.
The price swings came as doubts crept up about the Federal Reserve's capability to calm investors' anxiety over the
prospect of rising interest rates.
The Fed announced Wednesday it would start winding down its $85-billion-a-month monetary stimulus in January amid
signs of a strengthening economy. Fed officials signaled that the bank would continue to hold short-term interest rates
lower for longer even if it is ready to dial back, or taper, its bond purchases by $10 billion a month. But, they said
the pace of withdrawing stimulus depends on the health of the U.S. economy.
"The market seems to believe that Fed will have a difficult time holding zero-interest policy in place if the economy
is in fact improving," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.
Earlier Friday, the 10-year yield rose as high as 2.964%, the highest level since Sept. 11, after a report that the
U.S. economy grew at an annualized rate of 4.1% between July and September, the fastest clip since 2011.
The report added to anxiety that the Fed could quicken the pace of winding down its bond-buying and bring forward the
timing of the first interest-rate increase if the economic growth accelerates.
For the moment, buying interest near 3% appeared to put a lid on the pace of increase in bond yields.
Among the buyers in recent weeks have been Japanese investors, who could get much higher yields in 10-year Treasury
notes, compared with 0.681% on Japanese 10-year government debt.
Longer-dated Treasury bonds also got a boost as traders and investors unwound the Treasury curve-steepening trade.
In recent weeks, the trade, especially buying of five-year notes and selling of 10-year and 30-year bonds
concurrently, had become popular.
In essence, investors and traders bet that longer-dated yields would rise as the Fed tapers bond-buying, while
shorter-dated bond yields would be held down by the Fed's commitment to hold short-term interest rates near zero for
But a tepid five-year note auction earlier this week, coupled with concerns that the Fed might raise rates sooner than
thought, have prompted investors to sell five-year notes and buy back 10-year and 30-year bonds.
Friday, the 30-year bond was the best performer, with its price rallying by 1 10/32, and its yield falling by about
0.08 percentage point to 3.825%.
In contrast, the five-year note was down 4/32 in price, and its yield rose by about 0.03 percentage point to 1.673%.
The five-year note's yield rose by 0.12 percentage point Thursday.
"Not many people are looking to get in the way of [the sell five-year notes and buy 30-year bonds trade in the near
term]," said Scott Buchta, head of fixed-income strategy at Brean Capital LLC. "It has been pretty violent."
Analysts and traders believe the benchmark 10-year Treasury yield will likely rise further in 2014 as the economy
continues to strengthen, which saps demand for Treasurys as a safe harbor.
But traders believe the pace of increase in bond yields will be gradual, unlike the sharp rise during the May-June
period when the 10-year yield jumped by about one percentage point from 1.61% at the start of May.
The 10-year Treasury yield, a benchmark to set long-term borrowing costs for U.S. consumers and businesses, has
climbed from 1.78% at the end of last year. Still, the yield remains relatively low, as it traded above 5.5% in 2007
before the financial crisis.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/4% 2-year 99 24/32 dn 1/32 0.376% +0.8BP
5/8% 3-Year 99 22/32 dn 3/32 0.731% +3.2BP
1 1/2% 5-year 99 5/32 dn 4/32 1.673% +2.9BP
2 3/8% 7-Year 100 6/32 up 3/32 2.343% -1.7BP
2 3/4% 10-year 98 27/32 up 11/32 2.885% -4.0BP
3 3/4% 30-year 98 21/32 up 1 10/32 3.825% -7.5BP
2-10-Yr Yield Spread: +250.9 BPS Vs +255.7 BPS
Write to Min Zeng at email@example.com
(END) Dow Jones Newswires
Copyright (c) 2013 Dow Jones & Company, Inc.
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