Treasuries fall as Fed policymakers express comfort with tapering

(c) 2013, Bloomberg News.

NEW YORK — Treasuries dropped, pushing 30-year yields to a two-year high, after minutes of the Federal Reserve's last meeting showed that policymakers were "broadly comfortable" with a plan to curtail bond purchases.

Yields on benchmark 10-year notes approached the highest in two year as the minutes showed Fed officials supported Chairman Ben Bernanke's plan to start reducing stimulus under quantitative easing later this year if the economy improves, with a few saying it might be needed soon. U.S.-registered bond funds lost $30.3 billion in August, a private report said.

"It does appear the markets are continuing to expect tapering," said James Camp, managing director of fixed income in St. Petersburg, Fla., at Eagle Asset Management Inc., which oversees $27.8 billion. "The Fed wants out of QE. In the near-term we see a 3 percent handle."

The Treasury 10-year yield advanced seven basis points, or 0.07 percentage point, to 2.89 percent at 4:02 p.m. in New York, according to Bloomberg Bond Trader prices. It climbed on Aug. 19 to 2.90 percent, the highest level since July 2011.

The 30-year bond yield increased six basis points to 3.92 percent, the highest since August 2011.

"Almost all committee members agreed that a change in the purchase program was not yet appropriate," and a few said "it might soon be time to slow somewhat the pace of purchases as outlined in that plan," according to the record of the Federal Open Market Committee's July 30-31 policy session released Wednesday in Washington.

Policymakers next meet Sept. 17-18. They probably vote to trim the program, according to 65 percent of economists surveyed by Bloomberg between Aug. 9-13.

"The bond market is selling off, as there was no bond- friendly news from the minutes," said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. "There wasn't a very dovish discussion, it seems."

The Fed's staff continued to work on tools for the central bank's exit from record stimulus, the minutes showed, briefing participants on the possibility of "a fixed-rate, full- allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates."

Such a tool would allow the FOMC to offer an overnight, risk-free instrument to a "wide range of market participants," and possibly improve their ability to keep short-term rates at desired levels.

The Fed has been conducting sporadically this month tri- party reverse repurchase agreements with primary dealers and its expanded list of counterparties including money market mutual funds. The transactions, part of a series of open-market operations first announced in December 2009, don't represent any change in monetary policy, it said.

The FOMC affirmed a pledge on July 31 to continue bond buying until seeing signs "the outlook for the labor market has improved substantially." While employers in July expanded payrolls by 162,000 workers, the least in four months, the jobless rate fell to 7.4 percent, the lowest level since 2008.

Treasury losses this month are being matched by declines in mortgage-backed securities as the Fed prepares to reduce purchases of both securities.

U.S. sovereign and mortgage bonds have fallen 0.9 percent in August as of yesterday, according to Bank of America Merrill Lynch indexes. While both declined in May, June and July, Treasuries dropped more each time. Thirty-year fixed mortgage rates rose to 4.59 percent this week, approaching the highest level since May 2011, according to Bankrate.com.

Treasuries have lost investors 3.54 percent this year, according to Bloomberg U.S. Treasury Bond Index.

U.S.-registered bond mutual and exchange-traded funds lost $30.3 billion to investor redemptions this month, putting them on track for their slowest year since 2004, according to data from TrimTabs Investment Research.

The withdrawals for the month through Aug. 19 are already the third-highest on record, following $69.1 billion of withdrawals in June and $42 billion in October 2008, according to a report dated Tuesday from TrimTabs, of Sausalito, Calif. Bond funds have suffered $4 billion in redemptions this year, on pace for the biggest withdrawals since investors pulled $7 billion in 2004.

Bill Gross, Pacific Investment Management Co.'s founder and co-chief investment officer, said the conclusion of quantitative easing will end bull markets.

"No more QE's? No more bull markets," Gross wrote in a posting on Twitter.

Treasury yields rose earlier as data showed sales of previously owned U.S. homes climbed in July.

Purchases advanced 6.5 percent to a 5.39 million annual rate last month, beating the 5.15 million median forecast of economists surveyed by Bloomberg, figures from the National Association of Realtors showed today in Washington.

U.S. home prices climbed 2.45 percent in the second quarter, from 1.95 percent in the first, according to economists surveyed before a report tomorrow from the Federal Housing Finance Agency.

_ With assistance from Cordell Eddings and Lisa Abramowicz in New York, Jeff Kearns and Craig Torres in Washington, and Christopher Condon in Boston.

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