BLBG:Treasury 10-Year Notes Snap Five-Day Drop Before Fed Gives Rate Estimates
Treasury 10-year notes snapped a five-day decline, pushing yields down from within two basis points of a six-week high, before Federal Reserve policy makers issue projections for borrowing costs for the first time.
The U.S. is scheduled to sell $35 billion of five-year notes today and $29 billion of seven-year debt tomorrow. A $35 billion two-year auction yesterday drew stronger-than-average demand on speculation Treasuries will keep their refuge appeal as talks to restructure Greece’s debt reach a stalemate. The Federal Open Market Committee will probably keep the key rate unchanged today, a Bloomberg News survey of economists shows.
“The market will likely focus on the Fed’s long-term projections of the Fed funds rate, which is latest effort by the Central Bank to be more transparent,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London.
U.S. 10-year yields slipped one basis point, or 0.01 percentage point, to 2.05 percent as of 10:14 a.m. London time, according to Bloomberg Bond Trader prices, after rising to 2.07 percent. The 2 percent security maturing in November 2021 rose 3/32, or 94 cents per $1,000 face amount, to 99 17/32.
The rate climbed to 2.09 percent on Jan. 23, the most since Dec. 8. The 30-year bond also snapped a five-day drop, leaving the yield one basis point lower at 3.14 percent.
The central bank has left its target for overnight loans between lenders in a range of zero to 0.25 percent since 2008 and last month reiterated that economic conditions may warrant “exceptionally low” rates at least through mid-2013.
Low-Rate Extension
After today’s meeting, policy makers will provide an explanation for their assessments along with rate predictions.
“Today’s meeting will include participants’ projections for the funds rate path over the entire forecast horizon as well as the expected timing of the first rate hike for the first time,” Peter Goves and Nishay Patel, fixed-income strategists at Citigroup Inc., wrote in an-e-mailed report today. “We expect the rate guidance in the policy statement to move the timetable for current accommodation well beyond mid-2013 and into 2014.”
Confidence (USHBMIDX) among U.S. homebuilders rose in January to the highest level in more than four years, the National Association of Home Builders/Wells Fargo reported on Jan. 18.
European Crisis
“Data remain positive, but insufficiently so to push yields to sustainably higher levels,” said a report yesterday by Dominic Konstam, the global head of interest-rate research for Deutsche Bank AG in New York.
A government report today will show U.S. home prices were unchanged in November after falling 0.2 percent in October, and private figures will show pending home sales dropped in December, Bloomberg surveys of economists show.
Greek officials and private bondholders are negotiating the size of losses that creditors are willing to accept.
“In the short term, you can buy Treasuries because the Greece problem isn’t solved yet,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “Longer term, I don’t recommend buying. The U.S. economy, even the housing market, is stronger than expected.”
The Treasury 10-year yield will increase to 3.25 percent by year-end, Shimazu said.
The European Central Bank’s decision last month to offer unlimited three-year loans to financial institutions as part of its efforts to contain the region’s debt crisis is working, according to Tsutomu Komiya, a bond investor in Tokyo at Daiwa Asset Management Co. in Tokyo.
Money Markets
The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 75 basis points less than the euro interbank offered rate, according to data compiled by Bloomberg. The rate was the least expensive since August.
The measure has tightened from minus 162.5 basis points on Nov. 30, with a negative figure showing that European banks pay a premium to swap into dollar-based funding.
“The flight-to-quality movement has paused,” said Komiya, who helps oversee the equivalent of $119 billion at the unit of Japan’s second-biggest brokerage. “We will see risk-on markets in which equities and commodities rise and bond prices go down.”
U.S. 10-year Treasury yields will climb to 2.5 percent by mid-year, he said.
Average Demand
The U.S. two-year auction’s bid-to-cover ratio, which gauges demand by comparing orders with the amount of debt offered, was 3.75 yesterday, versus an average of 3.43 for the previous 10 sales.
The five-year notes being sold today yielded 0.92 percent in pre-auction trading, versus the record low of 0.88 percent at the prior sale on Dec. 20.
Investors bid for 2.86 times the amount offered in December, matching the average for the past 10 monthly auctions.
Indirect bidders, the category of investors that includes foreign central banks, bought 50.6 percent of the notes, the most in 16 months.
Treasury five-year notes have handed investors a 0.2 percent loss this year as of yesterday, versus a 0.8 percent decline for the broader market, according to indexes compiled by Bank of America Merrill Lynch.
U.S. corporate bonds have returned 0.7 percent, the figures show. The Standard & Poor’s 500 Index has gained more than 4.5 percent in the period after accounting for reinvested dividends, according to data compiled by Bloomberg.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
