Treasuries drop on Fed outlook

(Bloomberg) — Treasuries fell for the first time in a week before Federal Reserve policy makers begin a two-day meeting tomorrow at which they are forecast to further scale back bond purchases they have used to support the economy.

The 30-year bond yield rose from a nine-month low as stock futures gained before a nonfarm payrolls report this week forecast to show employees added the most jobs since November. The Treasury is forecast to borrow just more than $130 billion in coupon-bearing debt this quarter and may cut back on two- and three-year note auction sizes, according to Wrightson ICAP. Yields dropped last week amid simmering conflict between Russia and Ukraine.

"Equities have bounced and Treasuries are under pressure," said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "It's a reversal from Friday's price action. We expect another $10 billion in tapering."

Benchmark 10-year yields increased two basis points, or 0.02 percentage point, to 2.68 percent as of 9:20 a.m. in New York, based on Bloomberg Bond Trader prices, the first rise in six days. The 2.75 percent note due in February 2024 fell 5/32, or $1.88 per $1,000 face amount, to 100 19/32.

Yield changes

While the yield was more than a full percentage point from the record-low 1.379 percent reached in July 2012, it was still below its 10-year average of 3.45 percent.

Thirty-year bond yields rose two basis points to 3.47 percent. The yield dropped to 3.42 percent on April 25, the lowest level since July 3.

The Bloomberg Global Developed Sovereign Bond Index has risen 1 percent in April. It is up 3.7 percent in 2014, or triple the 1.1 percent gain from the MSCI All-Country World Index of shares, which includes reinvested dividends. Treasuries maturing in 10 years or longer have gained 2 percent this month and 9.4 percent this year, according to Bloomberg U.S. Treasury Bond Index data.

The difference between two- and 30-year yields narrowed to 2.99 percentage points on April 25, the least since June. The spread was 3.03 percentage points today.

Thirty-year bonds have rallied in April on the outlook for subdued inflation, while shorter-term notes lagged behind on speculation the Fed will raise interest rates at some point next year. Unrest in Ukraine increased demand for the relative safety of U.S. debt. Buy time

"This is not a great yield to have if you believe the economy is picking up," said Peter Osler, head of rates strategy at broker Marex Spectron Group Ltd. in London. "A view in the market is that we are in the economic uptrend and yields should head higher."

The yield difference between 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was little changed at 2.20 percentage points. That compares with an average of 2.21 percentage points over the past decade.

Fed policy makers will end their two-day meeting April 30 and is expected to keep its main policy-rate target unchanged.

Employers in the U.S. added 215,000 workers this month, the most since November, analysts project a May 2 report from the Labor Department will say. The unemployment rate fell to 6.6 percent from 6.7 percent, according to the median forecast in a separate Bloomberg survey. That figure would match January's as the lowest since October 2008.

The U.S. is scheduled to sell $15 billion in floating-rate notes tomorrow.

The Treasury is expected to announce on April 30 the amounts it will sell in three-, 10- and 30-year debt on three consecutive days starting May 6.

The Treasury may begin cutting the sizes of its 2- and 3- year fixed-rate note auctions again this quarter, probably starting with the May auction of two-year notes and the June auction of three-year notes, according to Wrightson. Bills may see a net redemption of $60 billion for the quarter, according to Wrightson.

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Treasuries drop on Fed outlook

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