By Dow Jones Business News,
December 10, 2013, 03:47:00 PM EDT
By Min Zeng
Prices of U.S. Treasury bonds rallied for a second straight session, putting a lid on the benchmark yield's ascent
toward the 3% threshold.
Foreign investors including Japanese scooped up bonds, attracted by yields near the highest in three months.
The foreign purchases forced traders to dial back wagers that prices would fall as the Federal Reserve moves close to
cutting back its $85 billion in monthly bond purchases. Closing out those bets involves buying bonds.
Adding to the market's price strength, demand on a sale of $30 billion three-year notes hit a 10-month peak.
The benchmark 10-year note was 16/32 higher in late-afternoon trade, yielding 2.797%, according to Tradeweb. Bond
prices rise when their yields decline.
The 10-year yield dropped to as low as 2.790% during Tuesday's trading, falling from the Friday peak of 2.932%
following the upbeat November jobs release.
The yield, a benchmark to set long-term borrowing cost for U.S. consumers and businesses, has risen from 1.78% at the
end of 2012.
Japanese investors have been among buyers of Treasury bonds in recent weeks as the 10-year Treasury yields was much
attractive compared to 0.665% on the 10-year Japanese government debt.
A weakening yen--which has weakened 18% versus the U.S. dollar this year--means Japanese investors see their U.S. bond
investments fattened when converting back to yen.
"Real, inflation adjusted rates in the U.S. remain palatable to many Japanese investors when compared to returns on
domestic bonds," said Richard Bryant, Treasury trader at Mizuho Securities USA Inc. in New York. "Japanese money
managers we speak to remain sanguine about the inflation outlook in the U.S. and have indicated interest in adding to
Treasury positions if 10-year note's yield rises above 3%."
The bond market faces a $21 billion sale of 10-year notes Wednesday and $13 billion sale of 30-year bonds Thursday.
The sales will be closely watched by market participants for indications of the potential effect of the Fed's cutback
on bond buying on demand for longer-dated bonds.
The 10-year note's yield has jumped from 1.61% at the start of May as investors started to worry that an improving
economy may allow the Fed to reduce its $85 billion monthly bond buying before the end of the year.
Many traders and investors believe bond yields would rise in coming months if the U.S. economy continues to
strengthen, which would allow the Fed to wind down, or taper, its monetary stimulus before the end of 2014.
Friday's strong jobs release strengthened investors' views that the Fed would cut bond buying either from next week's
policy meeting, or the following meeting in January.
But they believe that the rise would be gradual, unlike the sharp increase during the May-June selloff, as investors
are now better prepared for the rise in yields.
Analysts at Morgan Stanley said in a research note Tuesday the 10-year Treasury yield at the 2.6-2.9% range is
consistent with the market pricing in a 50-75% probability of a cutback on bond buying from the Fed at either the
December or January policy meetings.
Scott Buchta, head of fixed income strategy at Brean Capital LLC said the 10-year yield could rise to 3% or trade even
higher depends on how aggressive the Fed is in removing the stimulus and what the economic data looks like going
"I am betting that the Fed will err on the side of caution," he said. "I don't see us getting much above 3.25% without
seeing a significant pick up in inflation."
Treasury bonds have handed investors a loss of 2.27% in total returns this year through Monday, on pace for the
biggest calendar-year loss since 2009, according to Barclays.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/4% 2-year 99 29/32 flat 0.302% flat
5/8% 3-Year 100 3/32 up 2/32 0.595% -2.2BP
1 1/4% 5-year 99 1/32 up 7/32 1.451% -4.6BP
2% 7-Year 98 31/32 up 13/32 2.160% -6.4BP
2 3/4% 10-year 99 19/32 up 16/32 2.797% -6.0BP
3 3/4% 30-year 98 19/32 up 1 2/32 3.828% -6.1BP
2-10-Yr Yield Spread: +249.5 BPS Vs +254.9 BPS
Write to Min Zeng at firstname.lastname@example.org
(END) Dow Jones Newswires
Copyright (c) 2013 Dow Jones & Company, Inc.
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