BLBG:Treasuries Decline Before $13 Billion Auction Of 30-Year Bonds
Treasuries fell, snapping an advance from yesterday, as the U.S. prepared to auction $13 billion of 30-year bonds today following sales of three- and 10-year debt in the past two days.
Longer-dated bonds led losses on speculation 30-year yields that have dropped more than half a percentage point in the past three months are losing their allure. The decline in Treasuries was tempered before a report forecast to show the consumer-price index fell in May. The 10-year break-even rate, a measure of expectations for annual inflation, has fallen to 2.1 percentage points from this year’s high of 2.45 in March. The Federal Open Market Committee meets to review policy next week.
“Investors may be a bit cautious ahead of the 30-year auction but there should be a reasonable reception,” said Nick Stamenkovic, a strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks. “Today’s U.S. CPI should be bond market friendly but investors are starting to shift their focus towards next week’s FOMC meeting, pointing to choppy trading.”
The 30-year yield climbed two basis points, or 0.02 percentage point, to 2.73 percent at 10:18 a.m. London time, according to Bloomberg Bond Trader prices. The 3 percent bond due in May 2042 fell 10/32, or $3.13 per $1,000 face amount, to 105 19/32. The yield has dropped 69 basis points in the past three months.
The 10-year yield rose one basis point to 1.61 percent.
The Treasury 30-year bonds on offer today yielded 2.74 percent in pre-auction trading, compared with 3.09 percent at the previous sale on May 10. Investors bid for 2.73 times the amount available last month, versus 2.76 times in May.
Consumer Prices
The consumer-price index fell 0.2 percent in May, after being unchanged in April, according to a Bloomberg News survey of economists before the Labor Department report. That would be the biggest drop since a 0.8 percent decline in December 2008.
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, known as the break-even rate, dropped to 2.01 percentage points on May 30, the lowest since Jan. 17. It averaged 2.15 percentage points in the past decade.
The U.S. sold $21 billion of 10-year notes yesterday at a record-low yield of 1.622 percent. The bid-to-cover ratio was 3.06 times, versus 2.9 at the previous auction on May 9.
Treasuries have returned 3.2 percent this quarter through yesterday, Bank of America Merrill Lynch data showed. The MSCI All Country World Index (MXWD) of shares handed investors an 8.8 percent loss including reinvested dividends in the same period.
Greeks Vote
Greeks will vote again this weekend after a May election failed to produce a coalition government. Moody’s Investors Service cut Spain’s credit rating by three steps to Baa3 yesterday, citing the nation’s increased debt burden, weakening economy and limited access to capital markets.
“The relentless purchasing of Treasuries astounds me,” said Paul Montaquila, head of fixed-income trading at Bank of the West in San Ramon, California. “The uncertainty in Europe is an ever-lingering backdrop.”
A report yesterday showed retail sales in the world’s largest economy fell for a second month in May. The smallest wage gains in a year and unemployment exceeding 8 percent are taking a toll on the consumer spending that accounts for about 70 percent of the economy, leaving it more vulnerable to shocks from the European crisis.
‘Significant Risks’
“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Fed Chairman Ben S. Bernanke told lawmakers on June 7. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”
The Fed, which meets June 19-20, bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from December 2008 to June 2011, seeking to cap borrowing costs and stimulate the economy.
The central bank plans to buy as much as $2.25 billion of Treasuries due from February 2036 to May 2042 today under its program known as Operation Twist, which aims to replace holdings of shorter-term securities with longer-term bonds, according to the Fed Bank of New York’s website.
A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, which gauges the average inflation rate between 2017 and 2022, was 2.52 percentage points on June 11, down from a 2012 high of 2.78 percentage points on March 19 and a five-year average of 2.8 percent.
To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
