US 10-year yield climbs to 2-year high

(c) 2013, Bloomberg News.

NEW YORK — Treasuries fell, pushing 10-year note yields to the highest level in more than two years, as gains in U.S. consumer confidence and home sales bolstered bets the Federal Reserve will end bond purchases next year.

Thirty-year bond yields also reached the highest since 2011. Treasuries are poised for the first annual loss since 2009 amid signs the recovery of the world's biggest economy will prove resilient as the Fed tapers asset-buying. Ten-year yields have jumped 1.2 percentage points this year and will rise to 3.4 percent, from about 3 percent now, by the end of 2014, according to analysts surveyed by Bloomberg. The U.S. will announce Jan. 2 the amount it will auction in notes and bonds next week.

"You can assume interest rates will go higher — it's a matter of when, not if," said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. "Guys are paring down positions. They are taking a little bit off the table."

The 10-year yield climbed six basis points, or 0.06 percentage point, to 3.03 percent at 2 p.m. New York time, according to Bloomberg Bond Trader prices. It was the highest level since July 2011. The price of the benchmark 2.75 percent security due in November 2023 dropped 15/32, or $4.69 per $1,000 face amount, to 97 5/8.

Yields on 30-year bonds jumped seven basis points to 3.97 percent, the highest level since August 2011, while five-year note yields increased four basis points to 1.74 percent.

The Securities Industry and Financial Markets Association recommended U.S. Treasuries trading close on Tuesday at 2 p.m. in New York and remain shut on Jan. 1 for New Year's Day.

"Things are getting better," Mohamed El-Erian, chief executive officer of Newport Beach, Calif.-based Pacific Investment Management, said in an interview with Tom Keene on Bloomberg's Radio's "Bloomberg Surveillance."

Central banks' influence is going to change as they "pivot" in their policy approach away from direct stimulus to guiding market expectations on interest rates, El-Erian said.

Treasuries lost 3.2 percent this year through Monday, set for the first annual decline since 2009, according to indexes compiled by Bank of America Merrill Lynch. They returned 2.2 percent in 2012.

U.S. government securities maturing in 10 years or more have slumped 12 percent this year, the most among all of the 144 government bond indexes globally compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Treasuries traded at the cheapest level in more than two years, based on the term premium, a model that includes expectations for interest rates, growth and inflation. The gauge was at 0.63 percent, the least expensive on a closing basis since May 2011, according to a Columbia Management model. The current reading is above the average of 0.21 percent over the past decade and shows investors see bonds as close to fairly valued.

Bonds extended losses after the Conference Board said its index of consumer confidence in the U.S. rose to 78.1 in December from a revised 72 in the prior month. The median projection in a Bloomberg survey of economists called for a reading of 76.

The S&P/Case-Shiller index of property prices in 20 U.S. cities climbed 13.6 percent in October from a year earlier, the biggest 12-month gain since February 2006, a report showed on Tuesday in New York. Economists surveyed by Bloomberg called for a 13.5 percent advance.

A report next week will show U.S. employers added 193,000 workers this month after expanding payrolls by 203,000 in November, economists in a Bloomberg survey forecast before the Jan. 10 data. The policy-setting Federal Open Market Committee will release minutes of its Dec. 17-18 meeting on Jan. 8.

The U.S. will auction three-, 10- and 30-year Treasuries on three consecutive days beginning Jan. 7. It will announce the size of the sales this week. At offerings this month, the government sold $30 billion in three-year notes, $21 billion in 10-year debt and $13 billion in 30-year bonds.

"That's supply that we're going to have to set up for — that could put a little pressure on the market," said Donald Ellenberger, who oversees $10 billion of fixed income assets as head of multi-sector strategies at Federated Investors in Pittsburgh. "That supply is going to come at a very difficult time for the market to digest in front of nonfarm payrolls and FOMC minutes."

The FOMC said Dec. 18 it will cut its monthly bond purchases to $75 billion next month, from $85 billion. According to the median forecast of 41 economists surveyed by Bloomberg on Dec. 19, the central bank will pare its purchases by $10 billion in each of the next seven meetings before ending the program in December 2014 as the economy strengthens and joblessness decreases.

The estimates indicate the Fed will purchase $260 billion of Treasuries next year, a 52 percent decrease from this year's total, data compiled by Bloomberg show.

Policy makers also said on Dec. 18 "it likely will be appropriate to maintain the current target range for the federal funds rate well past" their 6.5 percent unemployment-rate threshold, especially if inflation stays below the Fed's 2 percent target. The benchmark rate has been in a range of zero to 0.25 percent since December 2008.

The odds of the Fed raising the interest-rate target by January 2015, based on data compiled by Bloomberg from futures contracts, increased to 22 percent, from 11 percent at the end of November.

Usage of the Fed's fixed-rate reverse repo facility surged before the end of the year as rates for borrowing and lending securities slid and banks shored up balance sheets.

The Fed Bank of New York drained $197.8 billion on Tuesday, the largest amount in a test of its fixed-rate reverse repo facility that began operation in September, through 102 bidders. Yesterday, it drained $102.6 billion from the banking system with 75 bidders.

The facility, which the central bank is testing as a tool for when it eventually reverses its unprecedented monetary accommodation, is a place for investors to put cash during the final week of the year. Typically as the year ends, dealer balance sheets come under pressure, making it harder for them to take cash in the repo market, driving repo rates lower.

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With assistance from Daniel Kruger in New York

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