Strong economic data push 10-year note yield to three-month high

Treasury 10-year note yields reached a three-month high after a report showed durable-goods orders rose in November more than forecast, boosting the case for the Federal Reserve to slow bond-buying further.

U.S. government securities fell for a second day. The Federal Open Market Committee said after its Dec. 17-18 policy meeting it will cut its monthly asset purchases by $10 billion to $75 billion starting in January. Treasuries reached the cheapest level relative to stocks in 3 1/2 years Monday.

“The durable goods number was strong, a good indication that the economies contributors to growth are expanding,” said Adrian Miller, director of fixed-income strategies at GMP Securities. “One month doesn’t make a trend, but it’s something the market wanted to see and confirms what the Fed has been seeing that gave confidence for their taper.”

The yield on the benchmark 10-year note rose three basis points, or 0.03 percentage point, to 2.95% early Tuesday. It touched 2.97%, the highest level since Sept. 11.

The Securities Industry and Financial Markets Association recommends a close at 2 p.m. New York time for Treasuries Tuesday, and that trading remains shut Dec. 25 for the Christmas holiday, according to the group’s website.

Bookings for goods meant to last at least three years rose 3.5% after a 0.7% drop the prior month, a Commerce Department report Tuesday in Washington. The median estimate of 75 economists surveyed by Bloomberg called for a 2% advance. Excluding demand for transportation equipment, which is often volatile, orders also beat projections.
‘LARGER STORY

“This is part of a larger story that the economy is better,” said Dan Greenhaus, chief global strategist in New York at BTIG. “The bias in yields remains to the upside. We’re coming up on 3% on the 10-year. Those levels should be breached” if data continue to improve.

The durable-goods data followed a report Monday showing consumer spending climbed in November by the most in five months.

Treasuries have lost 3% this year, according to the Bloomberg World Bond Indexes, while the Standard & Poor’s 500 Index of U.S. equities has returned 31% including reinvested dividends.

The S&P 500 climbed to a record in New York yesterday, cutting the ratio of estimated corporate earnings to share prices to 6.03%, compiled by Bloomberg showed. The difference between the earnings yield and the 10-year Treasury yield narrowed to 3.10 percentage points, the least since May 2010, compared with a five-year average of 4.52 points.
BUYING PACE

The FOMC said last week that it will cut its monthly purchases of Treasuries and mortgage-backed bonds by $5 billion each to $40 billion and $35 billion, respectively. It will slow buying “in further measured steps at future meetings” if the economy improves as forecast, according to a statement.

Bond investors seeking to avoid the first successive annual losses on Treasuries in at least 35 years are finding shelter in European government debt.

Yields on U.S. 10-year notes are estimated to rise more than a half-percentage point next year to 3.38%, which would result in a loss of 1.6%, according to data compiled by Bloomberg.

Yield forecasts for Spain and Italy, where borrowing costs soared to more-than-decade highs during the European debt crisis, indicate bond returns in 2014 will extend this year’s gains of as much as 11.1%.

With the Fed taking its first step last week to unwind its unprecedented stimulus, Robeco Groep, Fidelity Investments and Amundi are venturing into developed nations hit hardest by the crisis as confidence builds in European Central Bank President Mario Draghi’s ability to safeguard the 17-nation currency bloc.

(Bloomberg News)