BLBG:Treasuries Stay Lower Before $29 Billion Seven-Year Note
Treasuries stayed lower after falling yesterday as traders prepared to bid for $29 billion of seven-year debt in the last of three note sales this week.
U.S. government securities have handed investors a 1.2 percent loss this quarter, according to Bank of America Merrill Lynch indexes, as signs of improvement in the economy cut demand for the relative safety of the nation’s debt. Investment-grade and high-yield corporate bonds in the U.S. returned 3.1 percent, the indexes show. Corporate bond sales from the U.S., Europe and Asia topped $1 trillion in the first three months of the year amid signs the global economic recovery is taking hold.
“The U.S. economic outlook has improved and risk aversion in the euro region appears to have diminished,” said Luca Jellinek, head of European interest rates at Credit Agricole Corporate & Investment Bank in London. “If you combine that with the supply outlook, the risk is likely for Treasury yields to move higher from here.”
The benchmark 10-year yield was little changed at 2.2 percent at 9:41 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2022 traded at 98 7/32. The yield climbed two basis points, or 0.02 percentage point, yesterday.
The difference between the two-year swap rate and the yield on similar-maturity U.S. debt narrowed to 22 basis points yesterday, the least in seven months, indicating demand for higher yields outside the sovereign-debt market.
The 10-year Treasury yield was three basis points, or 0.03 percentage point, above its 200-day moving average. The average is seen as a barrier by some traders. The 30-year bond yielded 3.31 percent while its 200-day moving average was 3.32 percent.
Seven-Year Auction
The U.S. seven-year notes being sold today yielded 1.61 percent in pre-auction trading, compared with 1.418 percent at the previous offering of the securities on Feb. 23.
Investors bid for 3.11 times the amount offered last month, compared with an average of 2.86 for the past 10 auctions. Primary dealers, the 21 companies that underwrite the U.S. debt, purchased 38.9 percent of the securities, the least since December 2010 at the monthly auctions.
Direct bidders, non-primary dealers buying for their own accounts, bought 19.3 percent, the most since the Treasury Department revived sales of the notes in February 2009.
A U.S. five-year sale yesterday attracted the weakest demand in seven months. The bid-to-cover ratio was 2.85 at the $35 billion note sale, the least since the 2.71 level at the August auction. The U.S. sold $35 billion of two-year debt on March 27.
Further Options
The U.S. economic recovery isn’t assured and policy makers don’t rule out further options to boost growth, Fed Chairman Ben S. Bernanke said on March 27, according to a transcript of an interview with ABC News provided by the network.
Ten-year Treasuries have underperformed German bonds this year, with the extra yield investors demand to hold the U.S. securities widening to 37 basis points yesterday, the most since February 2011. The spread was 36 basis points today. German bonds are little changed this year, according to the Merrill Lynch indexes.
The Fed is replacing $400 billion of shorter-term Treasuries in its holdings with longer maturities as part of its efforts to hold down borrowing costs. Traders call it Operation Twist after a similar effort in 1961 to contain borrowing costs for companies and consumers. Policy makers said the goal of the plan is to put downward pressure on long-term interest rates.
The Fed plans to sell as much as $8.75 billion of Treasuries maturing from June 2014 to March 2015 today as part of the program.
‘Crisis Is Over’
The Fed’s Open Market Committee has pledged to keep the benchmark interest rate at virtually zero through at least late 2014. Policy makers cut their target for overnight loans between banks to a range of zero to 0.25 percent in December 2008 to support the economy during the worst U.S. recession since the Great Depression.
“The crisis is over,” said Stephen Roach, a professor at Yale University and the former non-executive chairman for Morgan Stanley Asia. “It’s time to think about producing more normal interest rates,” he told Tom Keene yesterday on Bloomberg Television’s “Surveillance Midday.”
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the Fed will probably shift its focus to mortgage securities to keep rates low when Operation Twist ends in June.
It will be a “twist on another twist going forward,” Gross said yesterday from Pimco’s headquarters in Newport Beach, California, in an interview on Bloomberg Television’s “In Business with Margaret Brennan.”
The U.S. economy grew 3 percent in the last three months of 2011, the most in six quarters, based on a Bloomberg News survey of banks and securities companies before the Commerce Department report today. The rate would be unchanged from the pace the department estimated a month ago. A separate report is forecast to show initial claims for jobless insurance were little changed last week at 350,000.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
