December 27, 2013 / 8:02 PM / 6 years ago

REFILE-TREASURIES-U.S. 10-year yield hits 2-year high, seen higher in 2014

* US Treasuries set for 3rd worst year in 4 decades-Barclays
    * U.S. 10-year yield breaks above 3 percent on light volume
    * Two-to-10-year yield gap grows to widest since 2011

    By Richard Leong
    NEW YORK, Dec 27 (Reuters) - U.S. benchmark Treasuries
yields rose above 3 percent to their highest level in more than
two years on Friday, nearly assuring 2013 becomes one of the
bond market's worst years in decades.
    Traders further pared their bond holdings in anticipation of
a further increase in yields in 2014, when the Federal Reserve
will buy fewer bonds, after Fed policy-makers expressed some
confidence the economy can grow with less monetary stimulus.
    The key challenge facing investors in coming months is
preparing for how quickly bond yields might rise, analysts say.
    "The 10-year yield has been normalizing as the data have
been coming in stronger," said Quincy Krosby, market strategist
with Prudential Financial in Newark, New Jersey, which has $1
trillion in assets under management.
    Barring a massive rally before year-end, the Treasuries
market should book one of its worst years on record.
    The Treasuries market has fallen 2.75 percent through
Thursday, on track for its third steepest annual loss going back
to 1973, according to an index compiled by Barclays.
    Five years earlier, the Treasuries market lost 3.57 percent.
In 1994, it fell 3.38 percent, the Barclays data showed. 
    However, analysts downplayed the 10-year yield's breach of
the 3 percent threshold for the second time this year due to the
light post-Christmas trading volume.
    "People are not going to set up new positions right now
based on this number," said Lou Brien, market strategist at DRW
Trading in Chicago.
    The 10-year Treasury yield is a benchmark for mortgage rates
and other long-term loan costs, as well as investment returns.  
    A steady, moderate increase in yields to, say, 3.5 percent
should not harm the housing recovery or the Wall Street equities
that set record highs in recent days, analysts said.
    Big swings in yields toward 4 percent or 2 percent, however,
could spook investors, causing them to pull money from stocks
and other risky assets.
    "As long as it happens slowly, it's not threatening for
other markets. What markets don't want is a sharp move in either
direction," Krosby said.
    The rise in 10-year Treasuries yield has been steep, jumping
1.4 percentage points since May, when Fed Chairman Ben Bernanke
told a congressional panel the central bank might consider
scaling back its third round of quantitative easing, which has
blown up its balance sheet by over $1 trillion.
    Last week, the U.S. central bank said it will reduce its
monthly purchases of Treasuries and mortgage-backed securities
by $10 billion to $75 billion in January, amid evidence of an
improving economy. At the same time, the Fed signaled its
commitment to hold short-term interest rates near zero because
unemployment has remained higher than policy-makers like and
inflation has been stuck below their 2 percent target.
    "The economic data have been better-than-expected, while at
the same time the Fed is promising to be easier for longer. Then
there's more chance of inflation later, which is driving the
10-year yield higher," said Brien.
    Domestic inflation has remained low because wages have not
been rising much. While there has been a pickup in monthly job
creation, much of the accelerated hiring has been in low-paying
services sectors, analysts said.
    There was no major economic release on Friday and the Fed
will not resume buying Treasuries until later next week.
    On the open market, the 10-year Treasury note 
last traded down 4/32 in price to yield 3.007 percent, after
earlier rising as high as 3.02 percent, the highest intraday
level since July 2011, according to Reuters data.
    The yield spread between two-year and 10-year Treasuries
grew to 2.61 percent, its widest since July 2011, up from 2.58
percent on Thursday and 2.51 percent a week earlier.
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