Treasury 30-year bond yield rises most in a year

Treasury 30-year bonds fell, pushing yields up the most in 10 months, as the European Central Bank cut interest rates and announced an asset-buying plan to spur growth and fend off the risk of deflation.

David Tepper, founder of hedge fund Appaloosa Management LP, declared the bond-market rally "done" after the ECB's 24-member Governing Council reduced all three of its main interest rates by 10 basis points and said it will begin asset buying next month. A private report said a US manufacturing index rose to the highest level in three years, even as the economy added fewer jobs than forecast last month. The US will sell $61 billion of notes and bonds next week.

Falling prices reflect "underlying concerns among bond traders that central banks may at some point achieve a reflation of their economies," said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. "The US feels like it's at a turning point for growth, though it's far from overheating." The 30-year bond yield rose 15 basis points, or 0.15 per centage point, to 3.23 per cent this week in New York, according to Bloomberg Bond Trader prices. It was the biggest jump since November 8 amid speculation the Fed would announce a tapering of bond purchases. The price of the 3.125 per cent security fell 2 26/32, or $28.13 per $1,000 face amount, to 98 1/32.

BOND MATTER

• Falling prices reflect underlying concerns among bond traders that central banks may at some point achieve a reflation of their economies
• Two-year rates were negative in Austria, Belgium, Finland, France, Germany and the Netherlands, as well as non-euro area nations Denmark and Switzerland, after the ECB cut rates
• The difference between the US 10-year note yield and the comparable German bund reached 153 basis points, the most since June 1999
• ECB will “purchase a broad portfolio of simple and transparent securities” and euro-denominated covered bonds, President Mario Draghi has said

The benchmark 10-year note yield rose 12 basis points, the most since March 7, to 2.46 per cent.

Rally's end
The 30-year yield jumped seven basis points on September 4 after the ECB cut its benchmark rate to 0.05 per cent and the deposit rate was lowered to minus 0.2 per cent. A reduction in the benchmark rate was predicted by just six of 57 economists in a Bloomberg News survey.

The central bank will "purchase a broad portfolio of simple and transparent securities" and euro denominated covered bonds, ECB President Mario Draghi said at a Frankfurt press conference.

"Draghi wants inflation in the Euro zone. He will not stop," Tepper, who has a fortune valued at $11.1 billion, according to the Bloomberg Billionaires Index, said September 4. "It's the beginning of the end of the bond-market rally."

Tepper, a former high-yield credit trader at Goldman Sachs Group Inc. who started Short Hills, New Jersey-based Appaloosa in 1993, said more than a year ago that he didn't like bonds long-term and, in November, told Bloomberg Television that he was betting against US Treasuries as a hedge.

'Attractive' treasuries
Two-year rates were negative in Austria, Belgium, Finland, France, Germany and the Netherlands, as well as non-euro-area nations Denmark and Switzerland, after the ECB cut rates, according to data compiled by Bloomberg. Ten-year rates in Ireland and Italy dropped to record lows.

The difference between the US 10-year note yield and the comparable German bund reached 153 basis points, the widest since June 1999.

"Given where European rates are, the US looks very attractive," said Richard Schlanger, who helps invest $30 billion in fixed-income securities as vice president at Pioneer Investments in Boston.

The range in 10-year yields through the end of the year is likely to be 2.375 per cent to 2.75 per cent, said Schlanger.

It will climb to 2.89 per cent by year-end, according to a Bloomberg survey of economists with the most recent forecasts given the heaviest weightings.

Jobs disappointment
Shorter-maturity securities rose yesterday after the Labor Department said the US added 142,000 jobs in August, the least this year. Traders see a 41 per cent chance Fed Chair Janet Yellen will raise the target rate for overnight loans between banks to at least 0.5 per cent by June, compared with 47 per cent before the report, federal funds futures showed.

"It's not a terrible number, but it's definitely disappointing," said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 22 primary dealers that trade with the Fed. "It still suggests to us the Fed's going to be cautious. The folks who think the Fed was going to hike early will have to re-evaluate that view."