BLBG:Treasuries Head for Second Weekly Decline Before New Home Sales
Treasuries headed for a second weekly decline before a government report that analysts said will show new home sales stayed near a five-year high in July, adding to signs of strength in the world’s largest economy.
Benchmark 10-year yields were within four basis points of the most in more than two years after Federal Reserve minutes released this week showed officials are comfortable with a plan to start reducing bond purchases if the economy improves. Treasuries due in 10 years and longer are the worst performing government securities in the Group of Seven this month before the U.S. sells $98 billion of notes and bonds next week.
“Tapering expectations are a burden on the Treasury market,” said Ralf Umlauf, a research analyst at Helaba Hessen-Thueringen in Frankfurt. “The market is confident in its opinion that tapering will start this year. Higher yield levels should attract some investors to next week’s sales.”
The U.S. 10-year yield was little changed at 2.89 percent at 6:10 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due in August 2023 was 96 21/32. The yield climbed to 2.93 percent yesterday, the highest since July 2011. It is still below the average of 3.54 percent in the past decade.
New home sales fell 2 percent last month to an annualized pace of 487,000, according to a Bloomberg News survey before today’s Commerce Department report. Sales climbed to 497,000 in June, the fastest since May 2008. Purchases of previously owned homes jumped in July to the second-highest level in more than six years, data showed Aug. 21.
Fed Debate
The Fed’s debate over when to taper $85 billion in monthly bond buying has roiled financial markets around the world and sparked a selloff in fixed-income assets. The central bank is buying $45 billion of Treasuries and $40 billion in mortgage bonds each month. U.S. policy makers next meet on Sept. 17-18.
Fed Vice Chairman Janet Yellen will moderate a discussion at the Kansas City Fed’s Economic Policy Symposium in Jackson Hole, Wyoming tomorrow. Ben S. Bernanke will be the first Fed chairman since 1988 to pass up attending at the meeting.
“Tapering has become much more likely, and the U.S. economy is improving,” said Kiyoshi Ishigane, a senior strategist in Tokyo at Mitsubishi UFJ Asset Management Co., which oversees the equivalent of more than $71 billion. “We have yet to be in a situation where we can take a big long position on Treasuries,” he said.
U.S. securities due in 10 years and longer tumbled 3.7 percent this month through yesterday, the biggest decline among G-7 nations, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Markets ‘Overshot’
The selloff has gone too far as markets misread the Fed’s signal it may slow bond purchases by bringing forward expectations for interest-rate increases, Pacific Investment Management Co. said. The U.S. central bank has kept its target for overnight lending between banks at almost zero since December 2008.
“Markets have misinterpreted and overshot,” Scott Mather, head of global portfolio management at Pimco, which runs the world’s largest bond fund, said in a telephone interview from Auckland. “It’s most likely that the Fed is at zero for another couple of years and the markets are, in our view, overshooting in bringing forward rate hikes at a time when both inflation and growth are well below the Fed’s targets.”
Mather said his “favorite trade” is taking advantage of the steepness of the U.S. yield curve.
Spread Widens
The extra yield 10-year Treasuries offer over two-year securities expanded to as much as 2.55 percentage points yesterday, the most since July 2011. The spread was little changed today at 2.49 percentage points.
The Treasury is scheduled to sell $34 billion of two-year notes on Aug. 27, $35 billion of five-year securities the following day and $29 billion of seven-year debt on Aug. 29.
The U.S. is cutting the two-year auction by $1 billion, the first reduction after selling $35 billion of the securities each month since October 2010. The five- and seven-year auctions have been unchanged since 2010.
The Treasury said on July 31 it expects to gradually decrease coupon auction sizes during the coming quarter as the nation’s fiscal health improves. The federal budget deficit for July was $97.6 billion, bringing the total for fiscal 2013, which ends Sept. 30, to $607.4 billion. It was the lowest figure for that stage of a fiscal year since 2008.
A $16 billion auction of U.S. five-year inflation-indexed notes yesterday drew the highest yield in more than three years amid bets the economic recovery is strong enough for the Fed to begin withdrawing monetary stimulus.
Primary dealers, those companies that underwrite the U.S. debt, predict the Fed will reduce the pace of its asset purchases in September by $15 billion, to $70 billion a month, a July survey showed.
“I would have liked to start cutting back earlier,” Fed Bank of Dallas President Richard Fisher, one of the most vocal critics of the bond purchases, said to reporters after a speech in Orlando, Florida, yesterday. “The economy is strong enough” to slow the pace of buying.
To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
