BLBG:Treasuries Snap Gain Before Three Debt Sales This Week
Treasuries snapped a two-day gain on speculation yields that approached record lows will erode demand when the government sells $72 billion of coupon-bearing securities this week, starting with a three-year auction today.
Benchmark 10-year notes, scheduled for sale tomorrow, yielded 1.62 percentage points more than the upper end of the Federal Reserve’s target range for overnight bank loans, the smallest difference in three months. The average over the past five years is 2.08 percentage points. Yields slid yesterday as investors sought the safest assets after elections in France and Greece raised concern European governments will drop deficit- cutting plans implemented to combat the region’s debt crisis.
“The market is very expensive,” said Kei Katayama, who buys Treasuries in Tokyo at Daiwa SB Investments Ltd., which oversees the equivalent of $62 billion and is part of Japan’s second-largest securities company. “If the European situation clears up, then Treasury prices should correct.”
U.S. 10-year yields were little changed at 1.87 percent as of 6:33 a.m. in London, according to Bloomberg Bond Trader data. The 2 percent security due in February 2022 changed hands at 101 5/32. The rate was as low as 1.82 percent yesterday. Benchmark yields slid to a record 1.67 percent on Sept. 23.
The percentage of Treasuries in Katayama’s debt holdings is less than the allocation of U.S. government securities in the indexes he uses to gauge performance. Katayama said it’s a position he has kept through this year.
Japan’s 10-year rate was 0.86 percent, versus the 18-month low of 0.855 percent set yesterday.
Australia’s note yielded 3.43 percent. The rate declined to 3.39 percent yesterday, the least ever.
U.S. Jobs
Treasury yields slid on May 4 when the U.S. Labor Department reported that American employers added 115,000 jobs in April, fewer than the projection of 160,000 in a Bloomberg News survey of economists. Unemployment fell to a three-year low of 8.1 percent as people left the labor force. The elections in Europe two days later increased demand for the relative safety of U.S. securities.
Fed Bank of Richmond President Jeffrey Lacker said much of U.S. unemployment results from structural weaknesses such as inadequate training that can’t be fixed by additional central- bank stimulus. Lacker votes on monetary policy this year.
“Some commentators are urging the Fed to take additional action as long as the unemployment rate remains elevated,” Lacker said yesterday in Greensboro, North Carolina. “But if elevated unemployment reflects largely fundamental factors rather than insufficient spending, such stimulus might have little impact on unemployment and instead just raise the risk of pushing inflation up.”
Fed Operations
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, has widened to 2.20 percentage points from 1.95 percentage points at the end of 2011. The five-year average is 2.03 percentage points.
The Fed is trying to keep borrowing costs down by replacing $400 billion of shorter-term debt in its holdings with longer maturities by the end of June. The central bank plans to buy as much as $5 billion of Treasuries as part of the plan today, targeting securities due from May 2018 to February 2020, according to the Fed Bank of New York’s website.
Debt Sales
“In the coming months, Treasuries should be well supported,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “It’s a safe- haven asset.” BNP’s U.S. arm is one of the 21 primary dealers that are required to bid at government debt sales.
Today’s three-year U.S. auction will be for $32 billion, and tomorrow’s 10-year sale will total $24 billion. The Treasury Department will conclude this week’s offerings with a $16 billion 30-year bond sale on May 10.
The three-year notes scheduled for sale today yielded 0.375 percent in pre-auction trading, declining from 0.427 percent the last time the notes were sold on April 10.
Investors bid for 3.36 times the amount of available debt last month. The average over for the past 10 sales is 3.38.
Indirect bidders, which include foreign central banks, bought 40 percent of the securities, the most since August at the monthly sales.
Three-year notes have returned 0.2 percent this year, while 10-year securities advanced 1 percent, Bank of America Merrill Lynch indexes show. Thirty-year bonds, which are among the most sensitive to inflation because of their long maturity, tumbled 2.3 percent.
Bank of America’s MOVE index, which measures Treasury price swings based on options, fell to 56.7 basis points yesterday, the lowest level in almost five years.
Ten-year rates may not fall much further, the Bollinger bands technical indicator shows.
The yield of 1.87 percent was one basis point, or 0.01 percentage point, more than the so-called lower Bollinger level. Bollinger bands gauge volatility by plotting standard deviations above and below a moving average. Analysts use them to determine the probable range for a security or yield.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
