(Bloomberg) -- Treasury 10-year notes fell for the first time in three days before the U.S. sells $96 billion of fixed-rate notes this week.

Treasuries remained lower after the Federal Reserve Bank of Chicago’s national activity index topped estimates. Benchmark yields approached the highest since January amid speculation recovery signs will encourage the Fed to end stimulus and raise interest rates sooner than investors currently envisage. Fed Chair Janet Yellen suggested last week the benchmark rate may rise by the middle of next year.

“The Fed is getting closer and closer to the exit,” said Vincent Chaigneau, global head of rates and currency strategy at Societe Generale SA in Paris. “Fed policy makers didn’t seem to be bothered by the recent soft patch in economic data which we think was distorted by the weather. Treasury yields are likely to rise further from here.”

The U.S. 10-year yield climbed three basis points, or 0.03%age point, to 2.77% at 8:37 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.75% note due in February 2024 fell 1/4, or $2.50 per $1,000 face amount, to 99 26/32. The yield climbed to 2.82% on March 7, the highest level since Jan. 23.

The benchmark yield will increase to 3.75% by year- end, Societe Generale’s Chaigneau said.

Treasuries due in more than a year fell 0.5% this month, the biggest loss of 26 bond markets, data compiled by Bloomberg and the European Federation of Financial Analysts Societies show.


The Treasury plans to sell $32 billion of two-year notes tomorrow, $35 billion of five-year debt the following day and $29 billion in seven-year securities on Thursday. It will also auction $13 billion of two-year floating-rate notes on March 26.

The Chicago Fed’s index rose to 0.14 in February versus a forecast of 0.1 in a Bloomberg forecast. It was a revised minus 0.45 in January.

U.S. new home sales fell 4.9% in February, after rising in January to the highest level since July 2008, based on a Bloomberg survey before the Commerce Department report tomorrow. Durable goods orders increased 0.7% in February from the previous month, a separate survey showed. The Commerce Department will issue the figures on March 26.

Treasury two-year yields climbed eight basis points last week after Yellen’s comments. The increase reduced the extra yield 30-year bonds offer over two-year notes to as little as 3.15%age points today, the narrowest since July 5. It has averaged 2.22%age points during the past decade.


The shrinking spread shows there is demand for 30-year bonds, said Yusuke Ito, a senior fund manager in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $39 billion. The company is betting long-term Treasuries will outperform shorter maturities, he said.

“If they hike the interest rates, then that’s going to increase deflationary pressure and increase downward pressure on long-term interest rates,” Ito said.

The five-year, five-year forward break-even rate, which projects consumer-price increases from 2019 to 2024, fell to 2.39% last week, the lowest since June. Longer-term bonds tend to rise or fall based on the outlook for inflation, while shorter maturities are anchored by the Fed’s benchmark. The odds policy makers will increase the rate to 0.5% or more by January are about 19%, based on futures contracts.


The Fed has cut purchases of Treasuries and mortgage-backed debt by $10 billion at each of its past three meetings and economists in a Bloomberg survey forecast the central bank will end monetary stimulus by year-end.

Foreign investors’ holdings of Treasuries have dropped.

Of the $8.1 trillion in U.S. government notes and bonds not held by the Fed, overseas investors owned $5.4 trillion as of January, data from the Treasury and the central bank compiled by Bloomberg show. The figures exclude Treasury bills, which have maturities of one year or less.

The total is equal to about 67%, approaching the lowest level since the government began releasing the data in 2000. Overseas investors scaled back their pace of U.S. debt purchases last year, increasing their holdings by $228.2 billion, or 4.1%, the least in seven years.

China, the largest foreign creditor with $1.27 trillion of Treasuries as of January, has slowed its accumulation to about 3.1% annually since 2010. That compares with an average yearly increase of 34% in the 10 years before.

China’s slowing economy and a weakening yuan may further damp its demand for Treasuries, said Jane Foley, a senior currency strategist at Rabobank International in London. The yuan has weakened 2.3% versus the dollar this year.

“China will probably remain a large buyer of U.S. Treasuries but a weaker yuan will make them look more expensive,” Foley said. “It could be that outward investment flows generally could be faced with a road bump.”

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