Treasuries Drop in Longest Losing Streak Since 2006

By Emma Charlton and Masaki Kondo - Mar 15, 2012 6:26 PM GMT+0700

Treasuries fell, with 10-year notes dropping for a seventh day in the longest losing streak in more than five years, before U.S. reports forecast to show jobless claims decreased and a regional index of manufacturing advanced.

Benchmark yields climbed to the highest level since October as a gauge of the inflation outlook increased to a seven-month high, damping demand for fixed-income securities. Government bonds around the world slumped after the Federal Reserve raised its assessment of the U.S. economy two days ago and said strains in global financial markets have eased.

“The market is on the back foot, so if the data is strong then Treasuries could decline more,” said Charles Diebel, head of market strategy at Lloyds TSB Bank Plc in London. “We’ve seen a fairly sharp move in a short space of time. The catalyst seemed to be the Fed acknowledging the better growth.”

Yields on 10-year notes advanced two basis points, or 0.02 percentage point, to 2.29 percent at 7:17 a.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 dropped 1/8, or $1.25 per $1,000 face amount, to 97 15/32.

The 10-year note yields touched 2.35 percent, the highest level since Oct. 28. The seven days of yield gains is the longest stretch of increases since the nine-day period ended June 26, 2006.

Last Year’s High

While 10-year note yields are rising, they are still below last year’s high of 3.77 percent and the average over the past 10 years of 3.87 percent.

Two-year Treasury yields were little changed at 0.38 percent after increasing to 0.41 percent, the highest level since July 29. Thirty-year bond yields advanced one basis point to 3.42 percent after reaching 3.49 percent, the highest level since Sept. 2.

Fed policy makers refrained at their March 13 meeting from new actions to lower borrowing costs, saying the U.S. labor market is gathering strength.

German 10-year bunds slid for a third day, with the yield rising two basis points to 1.97 percent. Ten-year gilt yields advanced three basis points to 2.37 percent. Standard & Poor’s 500 Index futures expiring in June gained 0.1 percent.

Applications in the U.S. for jobless benefits fell to 357,000 last week from 362,000 in the previous period, according to the median forecast in a Bloomberg News survey before today’s Labor Department report. The Philadelphia Fed’s general economic index rose to 12 this month, from 10.2 in February, a separate survey showed. Readings greater than zero signal expansion in eastern Pennsylvania, southern New Jersey and Delaware.

‘Recovery Path’

“The U.S. economy is on a recovery path,” said Yoshinori Shigemi, a strategist for non-yen debt at RBS Securities Japan Ltd. in Tokyo, a unit of Royal Bank of Scotland Group Plc. “We see an upward trend in Treasury yields in the near term.”

The Labor Department is also forecast to report that the producer-price index rose 0.5 percent in February, the most since September, according to another Bloomberg News survey.

The 10-year break-even rate, a gauge of the outlook for consumer prices derived from the difference between yields on conventional and inflation-linked notes, increased to as much as 2.40 percentage points, the highest level since Aug. 2.

Ten-year yields have more room to rise, said Societe Generale SA, citing technical indicators.

The 10-year note yield may reach the October high of 2.415 percent, after breaching a 2.175 percent technical level, Hugues Naka, an analyst in Paris, wrote in a research note today. The 10-year yield reached 2.4176 percent on Oct. 28, according to data compiled by Bloomberg.

Treasury Losses

Treasuries maturing in more than a year have lost 1.7 percent in 2012, according to an index compiled by the European Federation of Financial Analysts Societies and Bloomberg. The gauge had posted three consecutive quarterly gains since March last year.

The extra yield, or spread, investors receive from holding 10-year U.S. Treasury notes instead of similar-maturity German debt widened to as much as 39 basis points. That’s the most since Feb. 21, 2011, based on closing price data compiled by Bloomberg.

The Fed is scheduled to buy as much as $4.25 billion of Treasuries maturing from March 2018 to February 2020 today under its program to replace holdings of shorter-term securities with longer-term bonds. The central bank bought $2.3 trillion of securities in two rounds of quantitative easing from December 2008 to June 2011 to spur economic growth through lower borrowing costs.

Bernanke on Recovery

“Despite some recent signs of improvement, the recovery has been frustratingly slow,” Fed Chairman Ben S. Bernanke said yesterday at a convention in Nashville, Tennessee.

RBS’s Shigemi recommended investors hold debt due in five to seven years to profit from so-called roll-down gains. As a bond nears maturity or “rolls down” the yield curve, it is valued at successively lower yields and higher prices. Using the strategy, the security is held for a period of time as it rises in price and is sold to realize the gain. The strategy works when longer maturities yield more than shorter-dated ones.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net