BLBG:Treasury Yields One Basis Point From 3-Week High Before Auction
Treasuries were little changed with the 10-year yield about one basis point from the highest level in three weeks before the U.S. sells $24 billion of the securities today.
Benchmark notes yielded about a quarter percentage point more than the U.S. quarterly inflation rate after being below it as recently as March, according to data compiled by Bloomberg. A $32 billion auction of three-year notes yesterday drew bids for 3.38 times the amount offered, compared with an average of 3.57 for the past 10 sales.
“Auction results for quite some time have been decent so I don’t see them as a big negative for Treasuries,” said Christian Borjesson, chief analyst at Nordea Markets in Stockholm. “Going forward we are going to be very data dependent. I think we will stick in the 1.70 to 2.05 percent range on the 10-year.”
The U.S. 10-year yield was little changed at 1.78 percent at 7 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2 percent note due in February 2023 was 101 30/32. The rate climbed to 1.79 percent yesterday, the highest level since April 12.
The benchmark yield has increased from this year’s low of 1.612 percent set last week. It jumped 11 basis points, or 0.11 percentage point, on May 3 after a U.S. Labor Department report showed employers hired more workers in April than economists predicted and the unemployment rate unexpectedly fell to a four- year low of 7.5 percent.
Term Premium
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was at minus 0.735 percent yesterday, the closest to zero since April 2. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Consumer prices increased at an annual rate of 1.5 percent in March, the smallest gain since July, the Commerce Department said April 16.
The previous 10-year auction on April 10 attracted bids for 2.79 times the amount of debt available, compared with 3.19 times on March 13.
The 10-year securities being auctioned today yielded 1.83 percent in pre-auction trading. The notes were sold at 1.795 percent last month, compared with a record-low auction yield of 1.459 percent set on July 11.
Expensive Treasuries
“The auction will be OK, better than the three-year sale,” said Kei Katayama, who buys non-yen debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $51 billion. “Treasuries are expensive, but yields are also low in other countries.”
Treasury yields still aren’t high enough to get Daiwa SB to buy, Katayama said. The company holds fewer of the securities than the percentage in the index it uses to gauge performance, he said.
U.S. 10-year notes have returned 0.5 percent this year, according to indexes compiled by Bank of America Merrill Lynch. Three-year securities gained 0.2 percent, while 30-year bonds declined 0.7 percent.
The government is scheduled to conclude this week’s auctions with a $16 billion sale of 30-year debt tomorrow.
Bidding has slowed at Treasury auctions this year, with the $753 billion in debt sales attracting an average of $3.02 in orders to buy per dollar of debt sold, compared with a record $3.15 in 2012, according to data released by the Treasury and compiled by Bloomberg.
Favor Stocks
Investors should favor stocks over bonds, said David Kelly, New York-based chief global strategist at JPMorgan Funds, part of the biggest U.S. bank.
“Invest in a way that protects you against rising interest rates because we will eventually see those,” Kelly said yesterday on Bloomberg Television’s “In the Loop” with Deirdre Bolton and Dominic Chu.
Yields will rise when the Federal Reserve signals it is planning to trim its bond-purchase program, he said. The central bank is buying $85 billion of Treasury and mortgage debt each month to support the economy by putting downward pressure on borrowing costs.
“It could happen as early as later on this year, maybe in September, maybe even before then, if the economy perks up a little bit over the next few months,” Kelly said.
The central bank will buy as much as $3.75 billion of Treasuries maturing between February 2019 and April 2020 today, according to the Fed Bank of New York’s website.
To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
