BLOOMBERG -- Treasuries were near the cheapest level in two years and BlackRock Inc. said the debt will fall further as the Federal Reserve cuts its bond-purchase program.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was 0.50 percent yesterday, the most since July 2011. The figure was 0.48 percent today. Bond funds will deliver “moderately negative returns,” said Rick Rieder, a bond investor at BlackRock, the world’s biggest money manager with $3.86 trillion in assets. The Fed’s first step may be to trim its monthly debt purchases in September, based on a Bloomberg survey of economists.
“The Treasury market is pricing in September tapering to the full,” said Makoto Suzuki, a senior bond strategist at Okasan Securities Co. in Tokyo. “A moderate recovery is continuing in the U.S. economy.”
Ten-year yields fell three basis points to 2.86 percent as of 12:18 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due in August 2023 rose 7/32, or $2.19 cents per $1,000 face amount, to 96 30/32. The yield climbed to 2.90 percent yesterday, the highest in two years.
U.S. government securities due in a decade and longer plunged 9 percent in the six months through yesterday, the biggest loss of 144 debt indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies.
Japan’s 10-year yield was little changed at 0.77 percent today. Australia’s climbed to a 16-month high of 4.05 percent.
An indicator of momentum signaled that Treasuries may be oversold. The 14-day relative-strength index for the 10-year yield has risen above the 70 threshold that indicates it may reverse direction. The last time it exceeded that level was July 5, which was followed by a two-week rally.
Treasuries of all maturities dropped yesterday, extending a loss this year to 3.8 percent, according to Bloomberg World Bond Indexes. The Standard & Poor’s 500 Index of shares has returned 17 percent included reinvested dividends during the period.
Treasury trading volume at ICAP Plc, the largest inter- dealer broker of U.S. government debt, dropped 22 percent to $247 billion yesterday. That compares with a 2013 high of $662 billion reached May 22 and this year’s average of $314 billion.
Volatility as measured by the Merrill Lynch Option Volatility Estimate MOVE Index rose to 99.48 basis points yesterday, the highest since July 9. The average for 2013 is 68.
Yields on 10-year notes will rise past 3 percent as the Fed scales back its purchases, Rieder said yesterday on Bloomberg Television’s “Surveillance” program with Tom Keene and Sara Eisen. The Fed needs to trim its bond-buying program, he said.
“It has created this tremendous distortion in interest rates,” Rieder said. “Most of the losses have come because the distortion is coming out. We think you are going to have moderately negative returns in bond funds, certainly this year into next.”
Fair value for 10-year yields is about 3 percent to 3.25 percent, he said. For an investors who buys today, an increase to 3.25 percent by year-end would result in a 2.1 percent loss, according to data compiled by Bloomberg.
The Fed is scheduled to issue the minutes of its last policy session tomorrow and plans to meet again Sept. 17-18.
Chairman Ben S. Bernanke said June 19 policy makers may start reducing their unprecedented bond-buying program this year and end it entirely in mid-2014 if the economy achieves the sustainable growth the central bank has sought since the recession ended in 2009.
Reports this month have shown gains in manufacturing, spending and housing starts along with a decline in the unemployment rate.
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