U.S. Treasury Bonds Strengthen, Recoup Earlier Price Losses

By Min Zeng 

U.S. Treasury bonds strengthened and clawed back earlier price losses as yields near the highest level in more than two years lured in fresh buyers.

The benchmark 10-year note's yield earlier touched 3.071%, the highest level since July 8, 2011, according to data provider CQG. Buyers have showed up in recent weeks as they see the 10-year yield around 3% as attractive. The yield is more than two times the U.S. inflation rate of 1.2% in November.

"Investors are coming back into the market after being away from their desks during the holidays and with cash building up and the 10-year yield above 3%, they found that as a nice buying opportunity," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.

In recent trade, the benchmark 10-year note was 5/32 higher in price, yielding 2.987%, according to Tradeweb. When bond yields fall, their prices fall.

Some analysts say Japanese investors would buy more Treasury bonds if yields continue to rise. The U.S. yield is more than four times that on the 10-year Japanese government bond. A weaker yen against the dollar has boosted Japanese investments in U.S. government debt in the yen terms.

The 10-year yield has climbed from 1.76% at the end of 2012. Growing confidence over the US economic outlook has dimmed the allure of Treasury bonds as a haven. Investors have also shed bond holdings as the Federal Reserve will start scaling back its $85 billion a month bond buying this month.

"I think momentum will be the driver of higher yields as clients peel off bonds in their portfolios and head for the equity market in 2014," said Tom di Galoma, co-head of fixed income rates trading in New York at ED & F Man Capital Markets.

While higher yields will boost long-term borrowing costs for U.S. consumers and companies, analysts believe a gradual rise in yields won't choke off economic growth. The 10-year Treasury note's yield serves as a key reference for long-term interest rates for consumers, banks and companies in the U.S. and abroad.

Even as the yield has more than doubled the record low of 1.38% set in July 2012, it remains relatively low from a historical perspective.

Goldman Sachs Group Inc. expects the 10-year yield to only rise to 3.25% by the end of this year. Some other banks and investors bet the yield could rise to 3.5% or higher if economic growth accelerates, which would quicken the pace for the Fed to wind down its bond buying.

Thursday, initial claims for jobless benefits, a measure of layoffs, decreased by 2,000 to a seasonally adjusted 339,000 in the week ended Dec. 28. Economists surveyed by Dow Jones expected 345,000 new claims for the week. The number of claims for the prior week was revised upward to 341,000 from 338,000.

Meanwhile, the manufacturing index from the Institute for Supply Management was 57 in December after 57.3 in November. Economists have expected 56.8.

Many analysts, investors and traders believe bond yields will rise in 2014 at a gradual pace, as there is little inflation threat. Fed officials have signaled they wouldn't raise short-term interest rates from near zero until at least 2015, which could also temper bond yields' ascent in the new year, traders and analysts said.

Bond yields could fall in the new year if U.S. economic growth falters, or the U.S. stock market suffers a selloff, they said.

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