BLBG:Treasuries Fall Before Seven-Year Auction, Durable Goods
Treasuries fell, pushing 10-year yields to the highest level in five weeks, before a $29 billion sale of seven-year notes and a report that economists said will show durable goods orders rose last month.
Benchmark notes dropped for a second day after the Federal Open Market Committee ended a policy meeting yesterday without saying whether it will continue with Treasury purchases after the expiration of its so-called Operation Twist in December. Treasuries also fell as European and Asian shares advanced, damping demand for safer assets. Ten-year yields will climb to 2.06 percent by June 30, according to a Bloomberg survey.
“This is a week of supply, which is weighing on Treasuries,” said Christoph Rieger, head of interest-rate strategy at Commerzbank AG in Frankfurt. “Also the Fed has not yet announced how it will deal with the end of Operation Twist in December. Equities are rallying, which is weighing further on Treasuries.”
The U.S. 10-year yield rose five basis points, or 0.05 percentage point, to 1.84 percent at 10:52 a.m. in London after climbing to 1.85 percent, the highest since Sept. 17, according to Bloomberg Bond Trader prices. The 1.625 percent note maturing in August 2022 declined 13/32, or $4.06 per $1,000 face amount, to 98 3/32.
The seven-year yield increased five basis points to 1.26 percent after rising to 1.27 percent, the most since Aug. 21.
Quarterly Decline
U.S. government securities due in 10 years and longer have handed investors a 6.3 percent loss in the past three months, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
“I just don’t think there’s any value in Treasuries,” said Roger Bridges, who oversees the equivalent of $15.5 billion of debt as head of fixed income at Tyndall Investment Management Ltd. in Sydney. “Growth isn’t as bad as people were expecting.” He said he favors shorter maturities, those that will fall least if yields increase.
Today’s auction will be the last of three note sales this week. The U.S. auctioned $35 billion of two-year debt on Oct. 23 and the same amount of five-year securities yesterday.
Durable goods orders rose 7.5 percent in September following a 13.2 percent slump in August that was the biggest since January 2009, according to the median forecast of 77 economists surveyed by Bloomberg News. The Commerce Department will release the report at 8:30 a.m. New York time.
Labor Department data at the same time will show claims for jobless benefits fell by 18,000 to 370,000 last week, another survey shows.
GDP Report
U.S. gross domestic product rose at a 1.9 percent annual rate in the third quarter after expanding at a 1.3 percent pace the prior three months, the median economist estimate showed before data from the Commerce Department tomorrow. That would be the first back-to-back readings lower than 2 percent since the U.S. was emerging from the recession in 2009.
The Stoxx Europe 600 Index (SXXP) of shares gained 0.6 percent and the MSCI Asia Pacific Index advanced 0.6 percent.
The Federal Reserve said the economy is still growing modestly and unemployment remains elevated as it maintained $40 billion in monthly purchases of mortgage-backed securities aimed at spurring the three-year expansion.
The Fed is swapping short-term Treasuries in its holdings for longer-term securities to cap yields as part of its efforts. The central bank plans to buy as much as $5.5 billion of Treasuries due from November 2020 to August 2022 today, according to the Fed Bank of New York’s website.
Higher Costs
The latest bond-buying program may lead to higher costs in the economy, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC, a financial advisory company based in Philadelphia.
“It does add a level of risk to the inflation outlook,” LeBas said yesterday on Bloomberg Television’s “Taking Stock” with Pimm Fox. LeBas recommended corporate bonds, including high-yield debt, and municipal securities.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened two basis points to 2.49 percentage points. The average over the past decade is 2.17 percentage points.
Demand for yield is showing up in the swap market, where investors exchange fixed and floating-rate obligations.
The difference between five-year swaps and same-maturity Treasury yields narrowed to as little as nine basis points today, the least since March 2010. The spread between the fixed component of the rate exchange and Treasuries yield narrows as demand for assets outside the government debt market increases.
To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
