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Treasury Yields Rise From Six-Week Low on Fed-Tapering Outlook

Jan. 21 (Bloomberg) -- Treasuries fell, with 10-year yields climbing from almost the lowest level in six weeks, on speculation the economic recovery is strong enough for the Federal Reserve to make more cuts to its debt-purchase program.

Today’s decline snapped the longest run of weekly gains since September before a report this week forecast to show manufacturing climbed in January. Fed Bank of Richmond President Jeffrey Lacker said last week jobs growth in December that was the weakest in almost three years doesn’t signify a shift in the outlook for a labor market that has “improved distinctly.” The central said trimmed its monthly debt purchases to $75 billion from $85 billion this month and holds a policy meeting Jan. 29-30.

“It’s a reiteration of the thought the Fed is poised for more tapering,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. The 10-year note yield will trade between 2.79 and 2.93 percent during the next couple of weeks, he said.

Ten-year yields rose three basis points, or 0.03 percentage point, to 2.85 percent at 8:13 a.m. New York time, after dropping to 2.82 percent on Jan. 17, the lowest since Dec. 11, Bloomberg Bond Trader data show. The 2.75 percent note due November 2023 fell 7/32, or $2.19 per $1,000 face amount, to 99 5/32.

U.S. financial markets were shut yesterday for Martin Luther King Jr. Day.

Bond Returns

U.S. government securities have returned 1 percent this month, set for the biggest gain since April after a 1.5 percent loss during the last two months of 2013, according to the Bloomberg U.S. Treasury Bond Index.

Treasuries declined as an article in the Wall Street Journal suggested the central bank is set to cut back its monthly bond buying to $65 billion, from $75 billion when policy makers meet late this month. The Fed will probably taper asset buying in $10 billion increments during the next seven meetings before ending them in December, according to a Dec. 19 Bloomberg News survey of economists.

Investors expect the Fed’s benchmark interest-rate target to remain between zero and 0.25 percent during the next year. There’s a 24 percent chance the federal funds rate, the central bank’s target for overnight loans between banks, will rise by January 2015, data compiled by Bloomberg based on futures contracts show.

“The language we used to describe the program and how long it would last referred to the outlook for labor market conditions,” Lacker told reporters on Jan. 17 after a speech in Richmond, Virginia. “That’s improved distinctly.”

Lacker View

He dissented against continuing the purchases in 2012. Policy makers have said they will keep buying bonds until the outlook for the labor market has “improved substantially.”

The yield on benchmark Treasuries fell four basis points to 2.82 percent in the five days ended Jan. 17, completing a third weekly decline that was the longest streak since the period ending Sept. 27. The yield reached a 2 1/2-year high of 3.05 percent on Jan. 2 after climbing 1.27 percentage points in 2013, the biggest increase in four years.

The Markit Economics preliminary index of U.S. manufacturing based on a survey of more than 600 American manufacturers climbed to 55 this month from 54.4 in December, according to the median estimate of analysts surveyed by Bloomberg News before the figure is published on Jan. 23.

The National Association of Realtors is forecast to say on the same day sales of previously owned homes climbed 1 percent last month following a 4.3 percent drop in November.

Market Levels

“Treasuries got to an area where they were deemed to be cheap, particularly on a forward basis with the front end held by U.S. Fed policy,” said Roger Bridges, the head of fixed income in Sydney for Tyndall Investment Management Ltd., which oversees the equivalent of about $21 billion. “I don’t think there will be a major selloff like we saw last year.”

A gauge of Treasury volatility, the Bank of America Merrill Lynch MOVE index, declined to 60.28 on Jan. 17, compared with a 12-month average of 71.76.

Trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $223.1 billion at the end of last week after climbing to $478.2 billion on Jan. 10, the highest level since Nov. 20.

Treasury 10-year yields will climb to 3.40 percent by Dec. 31, according to the weighted average estimate of more than 60 forecasters surveyed by Bloomberg.

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