BLBG: Treasuries Little Changed as Stocks Increase, Debt Sales Loom
By Cordell Eddings
July 24 (Bloomberg) -- Treasuries were little changed as stocks rose and the government prepared to auction a record $115 billion in notes next week, part of an unprecedented pace of borrowing to stimulate the economy and service deficits.
Ten-year notes ended the week near July 17’s closing levels as the Dow Jones Industrial Average gained 4 percent over the past five days. Next week’s auctions will be only the second time the Treasury has sold three so-called coupon issues and an inflation-indexed maturity over a five-day period.
“With supply coming, it’s hard to argue for any type of rally in Treasuries,” said Arthur Bass, a managing director of derivatives in New York at the brokerage Newedge USA LLC.
The yield on the 10-year note fell one basis point, or 0.01 percentage point, to 3.66 percent at 4:34 p.m. in New York, according to BGCantor Market Data. The 3.125 percent security maturing in May 2019 rose 1/32, or 31 cents per $1,000 face amount, to 95 20/32.
The Standard & Poor’s 500 Index rose 0.3 percent, completing its best two-week rally since March.
“Although people are being sucked into the equity market rally, at some point you don’t want to have too many chips on the table,” said Dominic Konstam, head of interest-rate strategy at primary dealer Credit Suisse Securities USA LLC in New York, in an interview on Bloomberg Radio. “Bonds are going to look quite a good value particularly if we continue to back up toward a 3 3/4 to 4 percent level in 10-year Treasuries.”
Debt Auctions
The U.S. plans to sell $6 billion in 20-year Treasury Inflation Protected Securities, $42 billion in 2-year notes, $39 billion in 5-year securities, and $28 billion in notes maturing in seven years. The auctions will be held over four consecutive days starting on July 27. The previous record for nominal notes was $104 billion in 2-, 5-, and 7-year debt sold the week of June 22.
Ten-year yields fell 25 basis that week, the most since the five days ended March 20, after the Federal Reserve said it would keep rates near zero for the rest of the year. The securities offered that week drew higher-than-forecast demand and an increased amount of bids from the investor class that includes foreign central banks.
President Barack Obama is depending on foreign investors like China as he sells record amounts of debt to stimulate the economy and service unprecedented deficits. China, the largest foreign holder of U.S. debt with $801.5 billion, added net a $38 billion to its holdings in May, according to Treasury data. Russia, Japan, and Caribbean banking centers trimmed their holdings.
More Questionable
Demand from indirect bidders, whose ranks include foreign central banks, increased to 30.4 percent of debt sold through auctions this year, from 21.6 percent in 2008, according to data compiled by the Treasury Department.
Lower prices for U.S. debt may reflect investor concern that demand for Treasuries could be weak at current levels.
“Although the market has been able to accept much of the supply up until now, the auctions become more questionable at these yield levels the nearer we get to sustainable recovery,” said Christopher Sullivan, who oversees $1.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “There is not a lot of conviction in the market.”
The U.S. has raised $1.046 trillion in new cash this year selling Treasury securities, according to government data. The budget deficit this year is projected to reach $1.85 trillion, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.
$12 Trillion
The government and the Fed have spent, lent or pledged more than $12 trillion, with more than $1 trillion in debt purchases, to snap the steepest U.S. recession in five decades and revive credit markets that froze last year.
The difference in yield between two- and 10-year notes rose six basis points to 2.66 percentage points, the highest in seven weeks. A yield curve plots the rates of bonds of the same quality, but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously. The spread typically increases when investors anticipate a recovery because they demand more compensation for the risk that growth will spark inflation.
“The yield curve has been market-directional,” said Russ Certo, a managing director and co-head of rates trading at Broadpoint Capital Inc. in New York. “Over time it’s likely to steepen further.”
The difference between rates on 10-year notes and TIPS, which reflects the outlook among traders for consumer prices, was 1.88 percentage points, widening from almost zero at the end of 2008. The spread has averaged 2.21 percentage points for the past five years.
Yields indicate the Fed is having success in thawing credit markets that froze last year.
The London interbank offered rate, or Libor, for three- month dollar loans declined to 0.502 percent today, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of bank reluctance to lend, was at 30 basis points.
To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net.
