BLBG:Treasuries Decline Before 10-Year Auction Amid Budget Optimism
Treasuries fell, with 30-year yields climbing to the highest in a month, before the U.S. sells $21 billion of 10-year securities today amid optimism lawmakers are inching closer to a budget agreement.
Ten-year note rates reached a two-week high after President Barack Obama reduced his demand for tax increases as he and House Speaker John Boehner yesterday traded offers in attempts to avoid more than $600 billion in tax increases and spending cuts, known as the fiscal cliff. The Federal Reserve will say it’ll keep buying Treasuries to spur the economy when the central bank ends a two-day policy meeting today, according to a Bloomberg News survey of analysts.
“A combination of auction concession and the fiscal cliff is a good excuse to be pushing the yields up,” said Andy Cossor, a Hong Kong-based market strategist at DZ Bank, Germany’s fourth-largest lender. “The main reason yields are kicking up is perhaps unsubstantiated optimism regarding a breakthrough in fiscal-cliff negotiations.”
The 30-year yield climbed two basis points, or 0.02 percentage point, to 2.86 percent at 6:57 a.m. New York time, the highest level since Nov. 7. The 2.75 percent bond maturing in November 2042 declined 13/32, or $4.06 per $1,000 face amount, to 97 6/8.
The benchmark 10-year note yield advanced two basis points to 1.67 percent, the most since Nov. 27.
The current easing program, in which the central bank sells shorter-maturity notes and buys longer-dated sovereign debt, is set to expire at the end of this month.
Fed Meeting
The Fed’s Open Market Committee will announce that the central bank will begin buying $45 billion in Treasuries each month that will increase its balance sheet to almost $4 trillion, according to the Bloomberg survey.
All but one of 49 economists forecast the FOMC will purchase the securities to bolster an existing program to buy $40 billion in mortgage bonds each month. Policy makers pledged in October to continue that plan until the labor market improves “substantially.”
Today’s auction is part of $147 billion in sales of government notes planned for the rest of this year, according to estimates from Wrightson ICAP LLC. The Treasury is due to announce the results of the 10-year sale at 11:30 a.m. Washington time.
The notes to be sold today yielded 1.66 percent in pre- auction trading, compared with 1.675 percent at the previous auction on Nov. 7. Investors bid for 2.59 times the amount of available debt last month, down from 3.26 on Oct. 10.
‘Substantial’ Supply
“Because of the substantial amount of bonds being offered with fewer market participants around year-end, we may see a slight increase in Treasury yields in the very near term,” said Yoshinori Shigemi, a strategist at RBS Securities Japan Ltd. in Tokyo. “We can’t expect a continuous gain in yields, given the Fed is likely to be the top buyer next year.”
The Treasury sold $32 billion of three-year notes yesterday at a record-low yield of 0.327 percent. The bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, fell to 3.36 from 3.41 in November.
Obama reduced his demand for tax increases to $1.4 trillion from $1.6 trillion as he and House Speaker John Boehner traded another round of offers toward a budget agreement. The two sides remain hundreds of billions of dollars apart on taxes and spending, and they continue to disagree on whether a year-end deal should include an increase in the debt limit and fresh programs to boost the economy.
Obama, Boehner
Obama and Boehner spoke by telephone yesterday, according to a Republican congressional aide and an administration official.
Bill Gross reduced his holdings of Treasuries in the world’s biggest bond fund, a report posted on Pacific Investment Management Co.’s website showed yesterday.
The portion of U.S. government and Treasury debt fell to 23 percent of assets in Pimco’s $285 billion Total Return Fund last month from 24 percent in October, according to the report.
Bank of America Merrill Lynch’s MOVE index, which measures price swings of U.S. government securities based on options, fell to 51.6 basis points yesterday. It dropped to 51 on Dec. 3, the lowest on record going back to April 1988. Volatility climbed to 264.6 basis points in October 2008 as the global financial crisis intensified.
Volatility on Australian bonds was the highest among developed markets today, followed by Greek securities, according to measures of 10-year or equivalent-maturity debt, the spread between two- and 10-year securities, and credit default swaps.
Australia’s benchmark 10-year yield climbed nine basis points to 3.22 percent. It climbed as much as 10 basis points, the biggest intraday gain since Oct. 18.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.
