US Bonds Fall on Speculation of Mortgage-Hedge Sales

Treasuries dropped on concern the biggest monthly surge in yields since December will prompt investors to sell government debt as a hedge against losses on mortgage bonds as borrowing costs climb to a 14-month high.

Yields on the 10-year note, a benchmark for mortgage and corporate loans, rose for a third day on the risk the increase will lead to an even bigger surge as investors place bearish bets to protect against housing-debt losses triggered by rising rates, a practice known as convexity hedging. San Francisco Federal Reserve Bank President John Williams said last week a “modest adjustment downward” in the Fed’s bond buying is possible as “early as this summer.” The U.S. will sell $32 billion of three-year debt today.

It’s the “liquidation of mortgage paper, which needs to be hedged because of convexity fears,” said Thomas di Galoma, senior vice president of fixed-income rates trading at ED&F Man Capital Markets in New York. “People need to hedge out risk. That’s where the selling pressure is coming from.”

The 10-year yield increased four basis points, or 0.04 percentage point, to 2.25 percent at 9:54 a.m. in New York, according to Bloomberg Bond Trader prices. It reached 2.29 percent, the highest since April 4, 2012. The price of the 1.75 percent note due in May 2023 fell 10/32, or $3.13 per $1,000 face amount, to 95 19/32.

Bloomberg

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