Treasury 10-Year Yields Rise to One-Month High After Evidence of Recovery

Bloomberg.com   |  September 10 2010 1:45 EDT

Treasury 10-year notes fell, pushing yields to a one-month high, as evidence the world’s largest economy isn’t falling into another recession supported demand for equities.

“People are thinking the economy is not as bad and that we will not have a double dip,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “The inverse relationship with stocks will still be in full effect today.”

Benchmark debt yields were headed for a third week of gains in the longest stretch of advances since October as wholesale inventories rose in July more than economists forecast. Yields on 10-year notes pared advances as former Federal Reserve Chairman Paul Volcker said global economic imbalances need to be corrected if a worldwide recovery is to be sustained.

The yield on the 10-year note gained 3 basis points, or 0.03 percentage point, to 2.79 percent at 12:53 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 dropped 7/32, or $2.19 per $1,000 face amount, to 98 19/32.

The 10-year note yield advanced earlier to 2.82 percent, the highest level since Aug. 10, when the Federal Reserve said it would resume buying Treasuries to support the economy.

The yield has climbed 8 basis points this week, the most since rising 10 basis points during the period ended April 2. The three weeks of gains is the longest stretch of increases since a rally over three weeks that ended Oct. 23.

Two-Year Yield

The 2-year note yield was little changed at 0.57 percent and was headed for a weekly advance of 6 basis points. It touched the record low of 0.4542 percent on Aug. 24.

The extra yield investors demand to hold 10-year notes over 2-year debt widened for a third day on eased concern the U.S. recovery is stalling. The spread rose to 2.21 percentage points, the highest on a closing basis since Aug. 10.

“Selling into upticks remain the preferred strategy,” John Spinello, chief technical strategist in New York at Jefferies Group Inc., wrote in a note to clients. The firm is one of the 18 primary dealers obligated to participate in U.S. auctions. Spinello expects the yield on the 10-year note to rise toward 2.88 percent by the end of September.

Treasury 10-year note yields remained higher after the Commerce Department reported that inventories at U.S. wholesalers rose in July by the most in two years on a rebound in demand. A 1.3 percent increase in the value of inventories was three times the median estimate in a Bloomberg News survey of 32 economists.

China’s Exports

China’s exports rose 34.4 percent and imports climbed a more-than-forecast 35.2 percent, leaving a $20.03 billion excess, a customs bureau report showed.

The Standard & Poor’s 500 Index rose 0.3 percent today after the report on inventories. Crude oil for October delivery rallied 2.6 percent to $76.16 a barrel. The yen slid 0.5 percent to 84.17 against the dollar as Treasuries yields rose, widening the difference between Japanese and U.S. interest rates and boosting appetite for the greenback to fund purchases of America’s debt.

Treasuries 10-year note yields rose yesterday following the $13 billion auction of 30-year bonds as primary dealers ended up with the highest share of the debt in 11 months. The government sold $33 billion of three-year notes on Sept. 7 and $21 billion of 10-year notes the following day.

Global high-yield bond sales are poised to exceed 2009’s record issuance as the riskiest companies take advantage of plunging borrowing costs and investor demand to refinance debt.

Volcker on Recovery

U.S. 10-year yields pared gains today as Volcker, an economic adviser to President Barack Obama, said at a conference in Calgary that the U.S. and European economies may take years to rebound fully from the recession. Some emerging nations such as China are experiencing “remarkable” growth, he said.

The world’s largest economy will grow an average 2.5 percent in 2011, less than the 2.8 percent projected last month and slower than an estimated 2.7 percent this year, according to the median of 59 forecasts in the survey taken Sept. 1 through Sept. 9. Analysts also expect household purchases will cool and the jobless rate will hold above 9 percent.

Treasury 10-year yields tumbled on Aug. 10, when the Fed said after its policy meeting that it would keep its bond holdings level by resuming the purchase of U.S. debt to support a recovery it described as weaker than earlier anticipated.

“It’s going to be a close call for the U.S. regarding this double-dip fear,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Any batch of negative data will fuel this angst.”