BY BLOOMBERG NEWS
Treasuries declined after a measure of consumer confidence in May reached an almost six-year high and an index of leading economic indicators topped forecasts, as Federal Reserve officials debate the pace of asset purchases.
The 10-year yield climbed from almost the lowest level in a week as Fed Bank of San Francisco President John Williams said yesterday the central bank may begin to slow bond purchases as early as this summer. The difference between yields on 10-year notes and similar-maturity inflation-indexed debt shrank to the lowest level since August, indicating reduced concern about rising prices.
"The Fed is going to continue its public debate about when to taper, without actually tapering," said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA, one of 21 primary dealers that trade with the Fed. "The 10-year note could gradually move back to the lows. We're right now from 1.85% to 1.98%."
Ten-year yields rose six basis points to 1.94%, according to Bloomberg Bond Trader data. The price of the 1.75% note due in May 2023 fell 1/2, or $5 per $1,000 face amount, to 98-9/32. The yield touched 1.86% yesterday, the lowest level since May 10.
Ten-year yields have risen for three straight weeks, from 1.66% on April 26, in the longest stretch of increases since December.
Issuance of Treasury notes, bonds and TIPS could plunge if the Congressional Budget Office's estimate of smaller federal deficits proves accurate, wrote Michael Schumacher, head of global rates strategy at UBS AG, in a report dated yesterday.
Net issuance totaled $667 billion between Oct. 1 and April 30, exceeding the CBO's predicted budget deficit with five months remaining in the fiscal year, they wrote.
A report May 14 showed the U.S. budget deficit will shrink this fiscal year to $642 billion, the smallest shortfall in five years, according to the nonpartisan CBO.
The agency reduced its estimate of the likely shortfall, citing stronger-than-expected tax receipts. In February, it had projected a $845 billion deficit for the 2013 fiscal year, which ends Sept. 30. Last year's deficit was $1.1 trillion.
Net issuance was $364 billion in the first four months of calendar 2013, suggesting that Treasury needs another $176 billion of net issuance this year, the UBS strategist, noting that amounts to a 21% decrease in gross issuance.
The Treasury announced yesterday it will sell $13 billion in 10-year TIPS on May 23. It sold an equal amount of the securities on March 21 at a yield of negative 0.602%.
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