BLBG:Treasuries Fall Before Existing Home Sales, Note Auctions
Treasuries dropped for a third day before a report that economists said will show sales of existing homes in the U.S. rose in April, weakening the case for the Federal Reserve to add to stimulus measures.
Longer-dated bonds led declines after Fed Bank of Atlanta President Dennis Lockhart said economic conditions don’t warrant another round of bond purchases by the central bank. A market gauge of U.S. inflation expectations increased for a third day. The Treasury plans to auction $99 billion of notes this week starting today.
“There doesn’t look to be any prospect of any fresh Fed measures to support the Treasury market,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “The market will have a tendency, especially in a risk-on scenario, of seeing the yield curve steepen,” he said, meaning longer-term yields will increase relative to shorter maturities.
The 30-year yield rose five basis points, or 0.05 percentage point, to 2.86 percent at 7:55 a.m. New York time, according to Bloomberg Bond Trader prices. It earlier climbed as much as seven basis points, the biggest gain since May 10, based on intraday prices. The 3 percent note due in May 2042 declined 1 1/32, or $10.31 per $1,000 face amount, to 102 25/32.
The 10-year rate climbed four basis points to 1.78 percent, widening the difference in yield with 30-year bonds for the first time in nine days. The spread increased one basis point to 1.08 percentage points.
Home Sales
Sales of existing U.S. homes advanced 2.9 percent in April from March, gaining for the first time in three months, based on a Bloomberg News survey of economists before the National Association of Realtors report today.
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents expectations for the rate of inflation over the life of the securities, increased for a third day. It climbed to as much as 2.21 percentage points today, the most since May 8.
Lockhart said a new round of bond buying to spur the U.S. economy isn’t needed at present, though the Fed should retain the option as the U.S. faces risks from Europe.
“I do not think this option can be taken off the table,” he said yesterday in Tokyo. Additional purchases “will work under the right circumstances. But I don’t believe such circumstances prevail at this time.” Lockhart votes on monetary policy this year.
Fed Sales
The central bank plans to sell as much as $8.75 billion of Treasuries due from March to September 2013 today, according to the Fed Bank of New York’s website. The sales are part of the a program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to help keep down borrowing costs.
Investors are debating whether the Fed will increase its debt purchases to spur the economy.
“We do not believe that is likely,” Bob Doll, chief equity strategist at New York-based BlackRock Inc. (BLK), wrote on the company’s website yesterday. “The Fed would need to see some deterioration in the pace of economic growth before it would decide to take action,” according to the company, the world’s largest money manager with $3.7 trillion in assets.
The Fed “may well” arrange another round of purchases, said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., which is based in Newport Beach, California, and runs the world’s biggest bond fund.
The 10-year yield will be 10 basis points lower or 30 basis points higher than the current rate by year-end, he said yesterday on the “Bloomberg Surveillance” radio program with Tom Keene and Ken Prewitt.
Auction
The U.S. plans to sell $35 billion of two-year notes today, the same amount of five-year debt tomorrow and $29 billion of seven-year securities on May 24.
Two-year notes yielded 0.3 percent in pre-auction trading, compared with 0.27 percent at the previous sale on April 24. Investors bid for 3.76 times the amount of available debt in April, the most since November at the monthly auctions.
Indirect bidders, the category of buyers that includes foreign central banks, purchased 32.1 percent, the lowest level since December.
“We’ve actually backed the two-year yield up somewhat from its lows and I would imagine that should be sufficient to attract good demand today,” said Monument’s Ostwald.
The two-year notes yielded 23 basis points more than similar-maturity securities in Germany. The spread reached a quarter percentage point on May 17, the most in almost two years.
European Union leaders are scheduled to meet tomorrow in Brussels amid speculation Greece will quit the euro. They plan to address the region’s fiscal crisis, damping demand for the safest securities.
UBS AG, one of the 21 primary dealers that deal directly with the Fed, is trimming its forecast for higher yields. The 10-year yield will be 2.4 by year-end, based on figures provided yesterday for a Bloomberg survey by Sophie Constable, an analyst in London. The prediction was 2.7 percent on May 14.
The 10-year rate may be capped at its 100-day moving average of 1.99 percent, according to data compiled by Bloomberg.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
