The extra yield investors can get by holding 10-year debt instead of two-year securities, the so-called yield curve, was at the highest level since July 2011. The Federal Open Market Committee said after its Dec. 17-18 policy meeting it will begin reducing $85 billion in asset purchases next month, while maintaining the benchmark interest rate at virtually zero.
“They are going to do the first couple of tapers and then see what happens,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tenn. “The data dependency will come probably starting at the April meeting. That’s when they will have enough time to gauge reaction to tapering.”
The yield on the benchmark 10-year note is up one basis point to 2.99% at 10:22 a.m. New York time. It was the highest level since Sept. 6, when the yield reached 3.0050, the most since July 2011. The price of the 2.75 percent security due in November 2023 declined 3/32, or 94 cents per $1,000 face amount, to 97 31/32.
The gap between yields on U.S. two- and 10-year notes was 2.58 percentage points, matching the level it reached Dec. 24, the most on a closing basis since July 2011.
Treasury yields climbed above their global sovereign peers on Dec. 24 for the first time since June 2010, data compiled by Bank of America Merrill Lynch show. The spread narrowed to 0.01 percentage point from a low of minus 1.18 point in November 2011. Non-U.S. debt includes securities issued by other Group of Seven nations, Australia and South Korea among others.
The yield difference between 10-year Treasuries and comparable German government debt increased to 108.5 basis points, the widest since 2006, as data shows the U.S. economy is accelerating at a faster pace than the euro region.
Treasuries traded at almost 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 0.6%, after reaching 0.63% on Sept. 5, the least expensive since May 2011, according to a Columbia Management model. The current reading is above the average of 0.21 over the last decade and shows investors see bonds as close to fairly valued.
Unemployment-benefit claims declined by 42,000 to 338,000 in the week ended Dec. 21, a Labor Department report showed today in Washington. Economists surveyed by Bloomberg called for a drop to 345,000.
The Fed will reduce bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, according to the median forecast in a Bloomberg survey of 41 economists on Dec. 19. The odds of an increase in the Fed’s benchmark interest-rate target by January 2015 were about 22% today, based on data compiled by Bloomberg from futures contracts. The chances were 11% on Nov. 25.
Fed officials said in their statement last week it “likely will be appropriate to maintain the current target range for the federal funds rate well past” their 6.5% jobless-rate threshold, especially if inflation stays below the Fed’s 2% target. The rate has been a range of zero to 0.25% since 2008.
“They’ll try to keep rates anchored as much as they can, but it will be difficult if data continues to come in strong,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The risk is if the economy speeds up faster than people expect, the Fed won’t want to, and won’t be able to, keep rates where they are.”
Treasury 10-year notes pay 1.75% after subtracting consumer price increases as a stronger economy pushes yields higher. The gauge of real yields has averaged 1.09% since December 2008.
Inflation as measured by the personal consumption expenditures price index rose 0.9% for the 12 months ended in November, versus the Fed’s target of 2%, and the jobless rate last month was 7%, a five-year low.
Today’s jobless-claims data followed reports on Dec. 24 that showed U.S. durable-goods orders rose in November more than forecast, and new-home sales exceeded projections.
U.S. gross domestic product climbed at a 4.1% annualized rate in the third quarter, the strongest since the final three months of 2011 and up from a previous estimate of 3.6%, Commerce Department figures showed Dec. 20 in Washington.