BLBG:Treasuries Drop a 5th Day Before Fed Meet as Stocks Gain
Treasuries dropped for a fifth day, with the 10-year note yield rising to the highest level since April, as global stocks gained before Federal Reserve policy makers end a two-day meeting today.
Seven-year notes also declined before the Treasury auctions $29 billion of debt due in January 2020 today, the last of $99 billion of note sales this week. An auction of five-year securities yesterday drew the highest yield since March. Fed Chairman Ben S. Bernanke’s latest round of bond buying will reach $1.14 trillion before he ends the program in the first quarter of 2014, according to the median estimate in a Bloomberg News survey of economists.
“The main driver is the strong flow into equities in general, which is leaving Treasuries a little bit under pressure,” said Allan von Mehren, chief analyst at Danske Bank A/S (DANSKE) in Copenhagen. “There seems like there is a portfolio shift underway. We are all waiting for the Fed meeting but our expectation is that they are not going to change course. That’s keeping a lid on the selloff.”
The 10-year yield rose three basis points, or 0.03 percentage point, to 2.03 percent at 8:35 a.m. in London, the highest since April 25, according to Bloomberg Bond Trader data. The 10-year rate increased 18 basis points during the past four days. The price of the 1.625 percent notes due in November 2022 fell 9/32, or $2.81 per $1,000 face amount, to 96 13/32.
Treasury yields may rise to 2.25 percent within three- to six months, von Mehren said.
Equities Climb
The MSCI Asia-Pacific Index of shares climbed 0.6 percent. The Dow Jones Industrial Average (INDU) reached a five-year high yesterday.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, shows Treasuries are the least expensive in nine months.
The 10-year term premium rose to minus 0.57 percent, the highest level since April 5, according to data compiled by Bloomberg. The measure dropped to a record minus 1.02 percent in July.
A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Policy makers said they may end their $85 billion monthly bond purchases in 2013, with members divided between a mid- or end-of-year finish, according to the record of the Federal Open Market Committee’s Dec. 11-12 gathering.
Fed Easing
Investor speculation that the Fed will end its third round of quantitative easing in 2013 is overdone, Bank of America Merrill Lynch economist Michael Hanson and strategist Priya Misra wrote in a research note yesterday. The statement from the FOMC is likely to keep the central bank’s current policy stance in place, they said.
“Yields may rise a little bit higher while the risk-on trade continues,” said Kazuaki Oh’e, a bond salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth- largest lender. “I don’t expect any large selloffs in Treasuries given that the Fed meeting will confirm it will continue its bond-purchase program.”
The seven-year notes scheduled for sale today yielded 1.43 percent in pre-auction trading, up from 1.23 percent at the previous sale of similar-maturity securities on Dec. 19. That compares with a record-low auction yield of 0.954 percent on July 26.
The U.S. sold $35 billion of five-year notes yesterday at the highest yield since March. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 2.88 at auction, versus 2.72 last month.
U.S. gross domestic product rose at a 1.1 percent annual rate in the three months ended Dec. 31, the least since the first quarter of 2011, according to the median estimate of economists surveyed by Bloomberg before the Commerce Department releases the data today.
Analysts in a separate poll estimate an ADP Research Institute report today will show companies added 165,000 jobs in January, down from 215,000 the previous month. The Conference Board’s index (MXAP) of U.S. consumer sentiment fell to 58.6 from a 65.1 reading in December, data showed yesterday.
To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
