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TREASURIES-U.S. yields rise to 2-1/2-year highs to cap dismal year
December 31, 2013 / 9:33 PM / 4 years ago

TREASURIES-U.S. yields rise to 2-1/2-year highs to cap dismal year

* Benchmark yields end above 3 percent near 2-1/2-year high
    * U.S. 10-year yield rises 1 percentage point in 2013
    * Treasuries set for 3rd-worst year in 40 years - Barclays
    * U.S. bond market sets for 2nd-biggest annual loss in 40

    By Richard Leong
    NEW YORK, Dec 31 (Reuters) - Benchmark U.S. Treasury yields
rose to their highest in nearly 2-1/2 years on Tuesday, capping
the third-worst year for the government debt market in four
decades as investors trimmed bond holdings ahead of the Federal
Reserve reducing its bond-purchase stimulus in 2014.
    The dismal year for Treasuries was a drag on the entire U.S.
bond market, which will book its second-biggest annual loss
since the mid-1970s.
    "U.S. bond market performance in 2013 was all about the
Fed," said Guy LeBas, chief fixed income strategist at Janney
Montgomery Scott in Philadelphia.
    In a light, shortened session, benchmark 10-year note
 yields rose five basis points to 3.026 percent, just
below the near 2-1/2-year high of 3.036 percent set just before
the market closed.
    The U.S. bond market closed early at 2 p.m. EST (1900 GMT)
and will stay shut on Wednesday for New Year's Day.
    For the year, the 10-year yield rose 1.27 percentage points,
according to Reuters data. Yields on medium-to long-dated
maturities jumped at least 1 point in 2013, while the two-year
yield grew only 13 basis points as the Fed signaled
it would hold short-term rates near zero for a protracted period
even after it stops buying bonds to keep interest rates low and
stimulate the economy.
    Treasuries remain on shaky ground as yields are expected to
rise further in the coming months, albeit at a slower pace than
the one seen this year in reaction to when Fed Chairman Ben
Bernanke introduced in late May the notion the U.S. central bank
might shrink its third round of quantitative easing, or QE3, by
the end of the year.
    The possibility of a policy shift roiled the bond market
this summer, causing the 10-year yield to spike to its highest
in more than two years by early September. Treasuries yields
retreated later that month when the Fed surprised the market by
not tapering bond purchases, but they resumed their climb this
month when it opted for a modest reduction in its monthly
purchases of Treasuries and mortgage-backed securities.
    On Dec. 18, Fed policy-makers said they will pare QE3
purchases by $10 billion a month to $75 billion in January.
    How quickly the Fed dials back QE3 will depend on
improvement in the labor market and whether inflation picks up
and moves closer to its 2 percent target next year.
    "Inflation and economic growth will be more significant for
10-year and longer bond yields in 2014, and we're expecting
those yields will drift modestly higher," LeBas said.
    In a Reuters poll released Dec. 11 before the Fed's tapering
decision, the median forecast among analysts on the U.S. 10-year
yield at the end of 12 months was 3.35 percent. 
    Such a modest rise in yields will only nick Treasuries
further, not bludgeon them as seen in the past seven months. 
    "At the end of the day, we are to see flat to slightly
negative (returns) in 2014," Jennifer Vail, head of fixed-income
research at U.S. Bank Wealth Management in Portland, Oregon,
said of Treasuries.
    Year-to-date, U.S. Treasuries posted a 2.63 percent loss
through Monday, the third-steepest decline behind a
3.57 percent decline seen in 2009 which was their worst annual
drop, according to an index compiled by Barclays. 
    The sell-off in government bonds was most intense among
long-dated issues, which the Fed targeted for its QE3 purchases.
They have lost 13.93 percent this year, exceeded
only by the whopping 21.4 percent plunge in 2009, Barclays data
    The third-worst year for Treasuries in 40 years rippled
across the bond market. 
    The Barclays U.S. Aggregate Index, which measures
the performance of Treasuries, mortgage securities, corporate
bonds and other investment-grade debt, was down 1.92 percent
year-to-date. It was the second-biggest annual decline ever in
the index's history going back to 1976. This year's loss was
surpassed only by the 2.92 percent fall in 1994 when then Fed
Chairman Alan Greenspan led a series of interest rate hikes.
    Bond volatility also spiked earlier in the year as the Fed
hinted at an exit to QE3 stimulus, but as that tapering has come
to pass, volatility has settled well below its mid-year levels.
    The Merrill Lynch three-month MOVE index, which
estimates future volatility of long-term bond yields, ended 25
percent higher in 2013, its first annual rise since 2008.
    As bond yields rose and volatility grew this year,
exchange-traded funds that bet against Treasuries enjoyed a
banner year, not far behind the hefty gains on Wall Street.
    For example, the Proshares Ultrashort 20-plus Treasury ETF
 rose 25 percent, snapping a three-year losing streak.
    Meanwhile, the benchmark Standard & Poor's 500 stock index
 was poised to end the year up nearly 30 percent, which
would be its biggest annual gain since 1997.

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