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Treasuries Tumble Before U.S. Announcement on Auctions as Equities Advance
Treasuries dropped, erasing gains and pushing 10-year yields up from almost a 14-month low, as stocks rose and investors sold government securities before the U.S. announces the size of next week’s note and bond sales.
Ten-year notes fell for the first time in two days as stocks climbed on evidence U.S. retailers’ sales are growing at the fastest pace in four years. The Treasury will sell $69 billion in 3-, 10- and 30-year securities next week, $1 billion less than last month, a Bloomberg News survey showed.
“People are selling bonds because you’ve got supply coming next week,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “They’re trying to make room for a steeper yield curve or a cheaper market.”
The 10-year note yield rose 5 basis points, or 0.05 percentage point, to 2.98 percent at 4:42 p.m. in New York, according to BGCantor Market Data. It dropped to 2.8793 percent on July 1, the lowest level since April 2009. The price of the 3.5 percent security maturing in May 2020 fell 15/32, or $4.69 per $1,000 face amount, to 104 3/8. Thirty-year yields increased 7 basis points to 3.96 percent and touched 3.97 percent, the highest level since June 29.
Two-year yields gained 2 basis points to 0.63 percent after tumbling to a record low of 0.5856 percent on June 30. The gap between 2- and 10-year yields, known as the yield curve, reached 2.37 percentage points, the most since June 29.
Goldman’s Call
The 10-year Treasury yield is at fair value at 3.1 percent and “only a very grim macro backdrop” can justify yields at 2.5 percent or below, Goldman Sachs Group Inc. said.
“We continue to stand by our long-held forecast of 3.25 percent for 3-to-6 months,” the company, one of the 18 primary dealers required to bid at Treasury auctions, said in an e- mailed note today.
Goldman’s statement came even as the company’s chief U.S. economist, Jan Hatzius, said job losses will keep inflation in check. Payrolls fell by 125,000 positions in June, the first drop this year, Labor Department data showed on July 2.
The U.S. will sell $35 billion in 3-year notes, $21 billion in 10-year debt and $13 billion in 30-year bonds on three days beginning July 12, according to the median forecast of 10 primary dealers. The amounts will be announced tomorrow.
A decline in the size of the 3-year note sale from $36 billion at the June 8 auction would mark the third reduction in offerings of the maturity since before the credit crisis. The U.S. sold $21 billion in 10-year debt on June 9 and $13 billion in so-called long bonds the next day for a total of $70 billion.
‘Can Be Challenging’
“We struggle to imagine that the prevailing economic- policy landscape won’t help the auction process, but are reminded that supply can be challenging when auctioned at the highs,” David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC, wrote in a note to clients.
The U.S. will sell $12 billion tomorrow in 10-year Treasury Inflation Protected Securities, or TIPS. Primary dealer Barclays Plc’s Michael Pond, the top-rated analyst of TIPS, said the U.S. may face a challenge selling the securities.
“We are concerned that the market will have difficulty absorbing this much supply given other headwinds and believe a significant concession is needed for the auction to go well,” Pond said in a note to clients dated July 2.
Sales by U.S. retailers probably grew at an average monthly rate of 4 percent in the first five months of the retail fiscal year that began Jan. 31, the most since 2006, the International Council of Shopping Centers said before a report tomorrow.
Stocks Gain
Stocks rose on the retail sales statement, with the Standard & Poor’s 500 Index climbing 3.1 percent. Equities also gained as people with knowledge of the talks said European bank stress tests may assume a 17 percent loss on Greek bonds, half of the worst-case scenario estimated by JPMorgan Chase & Co.
Ten-year yields earlier slipped after data yesterday showed U.S. service-industry expansion slowed in June. The Institute for Supply Management’s index of non-manufacturing businesses, which make up about 90 percent of the economy, fell to 53.8 in June, from 55.4 in the prior month.
James Paulsen, an investor at Wells Capital Management Inc. in Minneapolis, said forecasts for another U.S. recession are overdone and bond yields may be too low. After the global financial crisis, investors are giving too much weight to reports showing a slowdown, he said.
“We’re suffering a little bit in the post-2008 crisis from Armageddon hypochondria,” Paulsen, who helps manage $349 billion as chief investment strategist, said in an interview on Bloomberg Television. “Profits are still growing. They’re going to have another great profit quarter starting next week. If the economy does come back better than people think, then bond yields are going to go up.”
Ten-year yields will rise to 3.56 percent by year-end, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings.
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net;
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