Treasury Bonds Fall a Third Day as Fed Seen Buying Shorter-Maturity Debt
Treasury 30-year bonds fell for a third day on speculation the Federal Reserve will buy shorter- maturity debt and as the government prepared to sell $13 billion of the securities this week.
Government debt initially pared losses after minutes of the Fed’s last meeting showed policy makers focused on purchases of Treasuries, a move called quantitative easing, and boosting inflation expectations to add economic stimulus. Yields had climbed after the U.S. sold $32 billion of three-year notes, drawing the weakest demand since February.
“Where does the Fed have capacity to buy? The 6- to 10- year sector, so that’s where they are going to do the bulk of their purchases when they ultimately do a second round of quantitative easing,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG, one of 18 primary dealers that trade directly with the Treasury. “The market certainly doesn’t think that” 30-year bonds will be purchased, he said.
The yield on the 30-year bond rose seven basis points, or 0.07 percentage point, to 3.82 percent at 5:01 p.m. in New York, according to BGCantor Market Data. The 3.875 percent security due in August 2040 fell 1 9/32, or $12.81 per $1,000 face amount, to 100 31/32. Two-year note yields increased two basis points, breaking a string of eight daily losses, to 0.36 percent after earlier reaching a record-low 0.327 percent.
Ten-year yields increased four basis points to 2.43 percent. They have dropped 14 basis points since the Fed said Sept. 21 it was willing to ease monetary policy further.
“The market assumed that quantitative easing was a done deal,” said William Larkin, a fixed-income portfolio manager in Salem, Massachusetts, at Cabot Money Management, which manages $500 million. “This confirms it was a done deal, but much of it was already priced in, so we’re seeing some selling.”
Uncertainty in the market was increased by the discussion in the Sept. 21 Fed meeting minutes released today of raising inflation expectations in such ways as being more explicit about a desired rate of inflation or setting a price-level target, said Michael Moran, chief economist at Daiwa Securities Group Inc. in New York.
“People were counting on QE, and I think this view might mean a smaller step than the market was expecting,” Moran said. “Whatever the outcome, there will be much more uncertainty from here until the meeting.”
Policy makers “wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus,” the central bank said in the minutes. Treasuries rose earlier on speculation the minutes would show the Fed was set to step up buys of assets.
“From here the market will focus its attention on supply and go from there,” said James Combias, New York-based head of Treasury trading at primary dealer Mizuho Financial Group Inc.
Today’s three-year note auction, the first of three offerings this week of $66 billion in notes and bonds, had a bid-to-cover ratio of 2.95, the least since February. The figure, which shows demand by comparing total bids with the amount offered, was 3.21 at the previous sale and averaged 3.12 at the past 10 offerings.
The notes drew a record-low yield of 0.569 percent, compared with the 0.562 percent average forecast in a Bloomberg News survey of 7 primary dealers.
Details ‘Look Weak’
“The details of the auction do look weak,” said Suvrat Prakash, an interest-rate strategist in New York at primary dealer BNP Paribas. “Treasury buyers are looking to buy what the Fed buys right now, and that means more intermediate Treasuries. Before the Fed makes its decision, there will continue to be lots of uncertainty.”
Indirect bidders, an investor class that includes foreign central banks, purchased 29 percent of the three-year notes at today’s sale, compared with 47.5 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11.9 percent, compared with an average of 13.2 percent for the past 10 auctions.
Three-year notes have returned 5.1 percent this year, compared with a 9.3 percent gain for the broader Treasury market, according to Bank of America Merrill Lynch indexes.
Today’s auction was the sixth consecutive three-year offering in which the size was reduced. The government will sell $21 billion of 10-year debt tomorrow and $13 billion of 30-year bonds on Oct. 14.
The 10-year note yield will increase to 2.65 percent in the fourth quarter, according to the median forecast of 67 analysts in a Bloomberg News survey. The two-year note yield is expected to rise to 0.6 percent, another survey showed.
The difference between yields on 30-year bonds and Treasury Inflation Protected Securities narrowed for the first time since Sept. 30. The break-even rate, a measure of inflation expectations over the life of the maturity, slipped 0.02 percentage point to 2.35 percentage points after touching 2.2 percentage points, a 14 basis-point contraction.
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