Treasury 10-year note yields rose the most since the first week of the year as the European Central Bank said banks will repay more of its loans than forecast and a strengthening housing market reduced the haven appeal of United States government debt.
The benchmark security fell by the most since October 17 on Friday, after the ECB data spurred optimism the worst of the European debt crisis may be over, capping the biggest weekly decline since the five days ended January 4.
Bloomberg News reported that the slide in prices came before the first Federal Reserve policy meeting of the year beginning Jan. 29 and the release of the January employment report on February 1. The US will also auction $99bn in two, five- and seven-year notes next week.
It’s been a global risk-on trade,” Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York, said.
The ECB data “is certainly regarded as a favorable indicator,” Sullivan said. “We’ve entered a higher range in Treasury yields.”
The 10-year note yield rose 11 basis points, or 0.11 percentage point, to 1.95 per cent, according to Bloomberg Bond Trader pricing. The 1.625 per cent security due in November 2022 declined 30/32, or $9.38 per $1,000 face amount, to 97 3/32.
The 10-year note is likely to trade in a range with yields between 1.80 per cent and 2.06 per cent, Sullivan said.
The selloff surpassed the eight-basis-point rise in yields posted on January 2, when Congress broke an impasse about how to avert the so-called fiscal cliff by passing legislation skirting income-tax increases for more than 99 per cent of households.
The US House of Representatives voted on January 23 to temporarily suspend the nation’s borrowing limit.
The ECB said banks will pay back $184.4bn of its three-year loans, so-called Longer-Term Refinancing Operations, next week. That compares with the median forecast of €84bn in a Bloomberg News survey of economists.
The Frankfurt-based ECB flooded financial markets with two tranches of three-year loans a year ago to avert a credit crunch after banks stopped lending because of Europe’s sovereign-debt crisis. This was the first opportunity for early repayment by the banks.
“Banks can repay weekly now, so it should have a risk-on effect in the near term,” said Craig Collins, managing director of rates trading at Bank of Montreal in London. Treasury “rates are going to go higher.”
The Fed is holding a policy meeting for the first time since committing to buy $45bn a month in Treasury securities at its previous gathering December 12$.
The 10-year note yield rose to a seven-month-high on January 3 after minutes of the December meeting showed that participants disagreed on how long the Fed should continue its purchases, spurring speculation the central bank could end the stimulus program earlier than many investors anticipate.
Policy makers were “approximately evenly divided” between participants who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date.
Fed officials are gathering as the property market has shown signs of recovery and homebuilding has rebounded as low borrowing costs spur buyer demand. Builders sold 367,000 homes in 2012, the most in three years and the first annual increase in seven, Commerce Department figures showed yesterday.
“We think the housing recovery is going to continue,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Incorporated, one of 21 primary dealers that trade with the Fed. “The long end has been selling off.”
Claims for jobless benefits fell to a five-year low for a second week. The Labor Department will say Feb. 1 that the economy added 155,000 jobs this month, according to the median estimate of forecasters in a Bloomberg News survey.
The unemployment rate is expected to remain at 7.8 per cent.
The Federal Open Market Committee said in December that interest rates will stay low “at least as long” as the jobless rate stays above 6.5 per cent and if inflation is no more than 2.5 percent.
Treasuries returned 2.2 per cent in 2012, versus 11 per cent for bonds in an index of investment-grade and high-yield securities, according to Bank of America Merrill Lynch data. Company debt gained 6.8 per cent in 2011, 11 per cent in 2010 and 26 percent in 2009, the figures show.
The U.S. sold $15bn of Treasury Inflation-Protected Securities on January 24 at a yield of negative 0.63 per cent, the highest since May. The past seven offerings of the securities, beginning in November 2011, have been sold with negative yields.
Treasury will auction $35bn in two-year notes, an equal amount in five-year notes and $29bn in seven-year notes on three consecutive days starting January 28.