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Treasury 10-Year Notes Drop as Pending Home Resales Unexpectedly Increase
Treasury 10-year notes fell for a second day for the first time since July as pending home resales unexpectedly rose and initial jobless claims dropped, reducing demand for the relative safety of government debt.
The difference between 10- and 2-year yields widened as concern eased that the economic recovery is stalling before tomorrow’s payrolls report. The U.S. sold $10 billion in inflation-linked debt at a record-low yield and will sell $67 billion in 3-, 10- and 30-year securities next week.
“The market is exhibiting signs of being fully priced,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist at Morgan Stanley Smith Barney. “There is some vulnerability. The market will need a diet of information suggesting that economic activity continues to erode in order to sustain the rally we’ve had.”
The benchmark 10-year note yield rose 5 basis points, or 0.05 percentage point, to 2.62 percent at 4:10 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 fell 13/32, or $4.06 per $1,000 face amount, to 100.
Two-year note yields dropped less than 1 basis point to 0.50 percent, compared with the all-time low of 0.4542 percent set on Aug. 24. The 30-year bond yield increased 6 basis points to 3.71 percent.
The extra yield investors demand to hold 10-year notes over 2-year debt increased to 2.12 percentage points. The spread narrowed on Aug. 26 to 1.96 percentage points, indicating the flattest yield curve on a closing basis since April 2009.
Treasury Volatility
Volatility in the Treasury market reached a three-month high this week. Bank of America Merrill Lynch’s MOVE index, measuring price swings based on over-the-counter options maturing in 2 to 30 years, climbed yesterday to 110.10, the highest level since June 1.
At today’s 10-year Treasury Inflation Protected Securities auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of bonds offered, was 2.80, compared with an average of 2.62 for the past 10 sales. The sale drew a record-low yield of 1.019 percent, compared with 1.295 percent at the sale on July 8.
“The market has quite obviously warmed up to TIPS over the last year in spite of a dramatic increase in the pace of issuance and an inflationary environment that encourages little interest in protection,” Thomas Simons, a government debt economist in New York at Jefferies Group Inc., wrote in a note to clients. The firm is one of the 18 primary dealers obligated to bid at Treasury auctions.
More TIPS Auctions
The government added more frequent auctions of TIPS in May to improve the liquidity of the securities, whose principal is adjusted to reflect changes in the consumer price index. The increased issuance comes as the U.S. begins to reduce the size of other Treasury offerings after it increased sales to finance record deficits exceeding $1 trillion.
The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices, widened to 1.62 percentage points today after reaching a 2010 low of 1.47 percentage points on Aug. 25.
TIPS have returned 5.9 percent this year, compared with a 8.2 percent gain for the broader Treasury market, according to Bank of America Merrill Lynch indexes.
The government will sell $33 billion in 3-year notes, $21 billion in 10-year debt and $13 billion in 30-year bonds next week, the Treasury announced today. The total of $67 billion is the smallest combination of the maturities since July 2009. The amount was $74 billion in August and a record- tying $81 billion in February.
U.S. Housing
Treasury 10-year notes dropped as the National Association of Realtors reported that an index of pending U.S. home resales unexpectedly increased 5.2 percent in July from the prior month. The median forecast of 37 economists in a Bloomberg News survey was for a drop of 1 percent. The number of first-time unemployment claims in the U.S. decreased to 472,000 in the week ended Aug. 28 from a revised 478,000, the Labor Department reported today.
Employers eliminated 100,000 positions in August after cutting 131,000 jobs in the prior month, according to the median forecast of 78 economists in a Bloomberg News survey before the Labor Department’s nonfarm payrolls report tomorrow.
U.S. debt fell yesterday after a gauge of manufacturing unexpectedly increased in August. The Institute for Supply Management’s index rose last month to 56.3 from 55.5 in the previous month, the Tempe, Arizona-based group reported. Readings greater than 50 signal growth.
“Treasuries are seeing widespread sellers on the heels of some so-so economic numbers,” Kevin Giddis, head of fixed- income sales, trading and research at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a research note to clients. “The numbers don’t indicate we are about to break out of the current slow-growth, low-inflationary, jobless pattern, which usually keeps optimism on the sidelines.”
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net
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