BLBG: Treasury 10-Year Yield Near One-Week High as World Equity Markets Advance
U.S. 10-year Treasury yields were near the highest level in more than a week as better-than- expected corporate earnings boosted stocks, curbing demand for the safety of fixed income.
Treasury 30-year bonds were little changed before a $13 billion auction of the securities as data showed the U.S. trade balance widened, producer prices held steady and initial claims for jobless benefits increased. Pacific Investment Management Co., which runs the world’s biggest bond fund, said it sold U.S. debt, betting a second round of buys by the Federal Reserve, a move called quantitative easing, would have limited effects.
“The data won’t write the story for today -- it will be about the 30-year auction,” said Sean Murphy, a Treasury trader in New York at Societe Generale. “Based on what some of the Fed speakers said and the fact that Pimco is not sure of the effectiveness of QE, it still provides a real good cloud of uncertainty.”
The 10-year note yield rose one basis point, or 0.01 percentage point, to 2.44 percent at 8:46 a.m. in New York, according to BGCantor Market Data. It reached 2.48 percent yesterday, the highest since Oct. 5. The price of the 2.625 percent security maturing in August 2020 fell 3/32, or $0.94 per $1,000 face amount, to 101 19/32. The 30-year yield was one basis point lower at 3.81 percent.
Equities gained, with the MSCI World Index advancing 0.7 percent and futures on the Standard & Poor’s 500 Index climbing 0.2 percent.
Lower Demand Yesterday
Treasuries declined yesterday on an intraday basis after the U.S. garnered lower demand at a sale of 10-year notes, which raised $21 billion. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.99 versus an average of 3.1 for the past 10 sales. Treasuries later erased losses.
The 10-year offering drew a yield of 2.475 percent, within 15 basis points of the record-low 2.33 percent reached last week amid speculation the Fed will resume debt purchases to stimulate economic growth.
“We’re approaching the end of the bond market rally,” Douglas Hodge, chief operating officer at Pimco, said today in an interview in Seoul. “From where we sit, it’s very hard to suggest there’s going to be that kind of price appreciation that we’ve seen in bonds over the last 12 to 24 months.”
The 30-year bonds being sold today yielded 3.82 percent in pre-auction trading, matching the yield of the last sale, held on Sept. 9.
Thirty-year yields rose on each of the four trading days before today on concern a resumption of debt purchases by the Fed as part of its quantitative-easing plan would concentrate on debt maturing in five to 10 years.
Auction ‘Challenge’
“Today’s 30-year auction might be a challenge as the Fed seems to prefer buying” shorter-dated securities, Steve Barrow, head of Group of 10 foreign-exchange research at Standard Bank Plc in London, wrote in a research report. “But yields have risen quite a bit into the sale, so we are not sure that it will be a disaster.”
Investors bid for 2.73 times the amount of debt on offer last month, versus an average of 2.70 for the past 10 sales. Indirect bidders, the investor group that includes foreign central banks, bought 36.1 percent of the securities, versus the 10-auction average of 35.8 percent.
Central bankers, seeking ways to boost growth after lowering interest rates almost to zero and buying $1.7 trillion of securities, are weighing strategies for raising inflation expectations and expanding the balance sheet by buying Treasuries, according to minutes of the Fed’s Sept. 21 meeting.
Inflation Report
A government report tomorrow will show U.S. inflation was in check last month, economists said. Consumer prices rose 0.2 percent in September after a 0.3 percent gain the prior month, a Bloomberg News survey forecast.
The difference in yield, or spread, between 10-year and 30- year debt narrowed for the first day in 10. The spread reached a record 1.41 percentage points yesterday as the prospect of Fed easing stoked inflation expectations.
“It is at least questionable whether further moves by the Fed will automatically benefit the bond market, as inflation expectations are mounting,” Viola Stork and Ulrich Wortberg, economists at Helaba Landesbank Hessen-Thueringen in Frankfurt, wrote in an investor note today. “While market players still seem to consider the deflation scenario highly likely on a 10- year horizon, such expectations are no longer reflected to the same extent at the ultra-long end.”
Mortgage Bonds
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, was little changed at 2.06 percentage points. It’s approaching the five-year average of 2.10 percentage points.
The Fed is already reinvesting proceeds from its holdings of mortgage bonds in Treasuries. Ten- and 30-year Treasuries erased losses yesterday after the Fed said it would purchase about $32 billion in U.S. debt over the next month.
“The buybacks were announced and were larger than people expected, which has led to some buying,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors.
To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net.
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
