U.S. Yields Approach Highs Versus Germany, Japan on Fed Outlook

Treasury yields approached a seven-year high against their German counterparts and the most in 31 months versus Japanese bonds amid speculation the Federal Reserve will trim its debt purchases as soon as this month.

U.S. 10-year yields were 105 basis points more than similar-dated bunds. The gap was 108 basis points last month, the most since 2006. The spread to Japanese bonds was about 218 basis points, versus 223 in September, which was the widest since 2011. The European Central Bank and the Bank of Japan both increased efforts to reduce yields this year.

“The Fed is contemplating an exit strategy from monetary easing, while the ECB is seen as strengthening its low-rate policy to contain disinflation risks, and the widening yield gap shows this difference in monetary policy,” said Hajime Nagata, who helps oversee the equivalent of $115 billion as an investor at Tokyo-based Diam Co. “Japan’s monetary policy is closer to additional easing than to an exit, which is very different from the Fed.”

U.S. 10-year yields were little changed at 2.79 percent as of 4:32 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 2.75 percent security maturing in November 2023 was 99 21/32. The yield has climbed from 1.76 percent at the end of last year. It is below the average of 3.5 percent over the past decade.

Japan’s 10-year yield advanced two basis points to 0.63 percent, versus 1.74 percent inGermany as of yesterday. A basis point is 0.01 percentage point.

Comparative Returns

The Bloomberg U.S. Treasury Bond Index has fallen 2.5 percent in 2013. German bunds slid 1.2 percent, while Japan’s government bonds returned 2.6 percent, according to the Bloomberg indexes.

The ECB cut its main interest rate to a record low of 0.25 percent in November. The BOJ increased its bond-buying program in April to more than 7 trillion yen ($68 billion) a month as it fights 15 years of deflation.

Treasuries fell yesterday as the Institute for Supply Management manufacturing indexunexpectedly rose to the highest since April 2011, adding to speculation the U.S. economy is improving enough for the Fed to cut stimulus soon. Ten-year yields rose five basis points, or 0.05 percentage point.

The Fed has signaled its intention to reduce its $85 billion in monthly purchases of Treasuries and mortgage-backed debt. Minutes from the Federal Open Market Committee meeting on Oct. 29-30, released Nov. 20, showed policy makers expected economic data to show improvement in the labor market and “warrant trimming the pace of purchases in coming months.”

Policy makers have kept their target rate for overnight loans between banks at zero to 0.25 percent since 2008.

Job Growth

U.S. employers probably added 181,000 workers in November after increasing payrolls by 204,000 in October, based on a Bloomberg News survey of economists before the Labor Department reports the figure Dec. 6. Monthly job growth is averaging 186,300 this year, the most since 2005, according to data compiled by Bloomberg.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index rose to 73.15 yesterday, a level unseen since Oct. 16. That compares with a six-month low of 58.31 on Nov. 18.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, more than doubled to $318 billion yesterday, after Treasuries closed early on Nov. 29 following Thanksgiving in the U.S. the day before.

The yield premium that Treasury 10-year notes offer over the U.S. inflation rate reached 1.84 percentage points on Nov. 20, the most since February 2011.

“U.S. Treasuries are getting more attractive, not only the absolute yield, but inflation is getting lower and lower,” said Yoshiyuki Suzuki, who helps oversee the equivalent of $57.8 billion as head of fixed income at Fukoku Mutual Life Insurance Co. in Tokyo. Suzuki said he’d consider buying 10-year notes if their yields rise to 3 percent.

Source: Bloomberg