Thirty-Year Treasuries Fall on Bets Fed Buys Won't Boost Long-Dated Bonds

Treasuries declined, sending 30-year yields higher for a fourth day, as economic data pointing to a stronger recovery damped investor appetite for the safest fixed- income assets.

The yield premium investors demand to hold 30-year bonds instead of 10-year notes stayed near a record high amid speculation asset purchases by the Federal Reserve will fail to support the longest-dated securities. The U.S. plans to sell $72 billion of notes and bonds this week, starting with $32 billion of three-year debt today. Employers added 151,000 jobs in October, a report showed on Nov. 5.

“We’re seeing a significant underperformance of the very long end of the Treasuries curve,” said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, Germany. “The U.S. data has been pretty much surprising to the upside.”

The yield on the 30-year bond rose one basis point to 4.13 percent at 6:50 a.m. in New York. The 3.875 percent security maturing in August 2040 fell 5/32, or $1.56 per $1,000 face amount, to 95 20/32.

The 10-year yield rose less than one basis point to 2.54 percent, with the yield gap at 159 basis points, or 1.59 percentage points. The yield spread reached 164 basis points on Nov. 5.

U.S. economic indicators are starting to show improvement. The increase in payrolls exceeded all estimates in a Bloomberg News survey of economists and was the first advance in five months, a Labor Department report showed on Nov. 5.

Trade Deficit

The trade deficit probably narrowed in September as exports rose, according to economists surveyed by Bloomberg before the Commerce Department issues the figure on Nov. 10.

Fed Chairman Ben S. Bernanke sought to reassure investors inflation won’t get out of control as the central bank adds $600 billion to the economy.

“I have rejected any notion that we are going to raise inflation to a super-normal level in order to have effects on the economy,” Bernanke said at a Fed conference on Nov. 6.

He defended his decision in comments at the conference held in Jekyll Island, Georgia. “It’s critical for us to maintain inflation at an appropriate level,” he said.

Fed Board Governor Kevin Warsh said in an opinion piece in the Wall Street Journal that the central bank’s plans must be monitored for the risk they pose to disrupting market-set price- making. “The Fed can lose its hard-earned credibility -- and monetary policy can lose its considerable sway -- if its policies overpromise or under deliver,” Warsh wrote.

‘Follow the Fed’

The Fed on Nov. 3 announced it would purchase $75 billion of Treasuries a month through June. Treasuries due in 5 1/2 years to 10 years will account for 46 percent of the purchases, according to the New York Fed. Securities maturing in 17 years to 30 years will make up 4 percent of the total.

“While it may seem simplistic to suggest that one should follow the Fed there is very little argument to do anything else in terms of U.S. rate positioning,” Charles Diebel and David Page, strategists at Lloyds Banking Group Plc in London, said today in a research note.

The Fed is already reinvesting the principal payments from its holdings of mortgage securities in Treasuries. It will buy debt due from October 2016 to August 2020 today as part of the plan, according to its website. It plans to announce a new schedule of purchases on Nov. 10.

The $32 billion of three-year notes scheduled for sale today yielded 0.54 percent in pre-auction trading, which would be the least ever. The rate was 0.569 percent at the previous sale of the securities on Oct. 12.

Investors bid for 2.95 times the amount of available debt last month. The average of the past 10 auctions is 3.12. Indirect bidders, which include foreign central banks, bought 29 percent of the securities, down from 42 percent in September.

Improved Indicators

Central bank efforts to add cash to the economy have yet to spur lending. Rather than providing money to businesses and consumers, U.S. commercial banks are increasingly using the cash available by loaning it back to the government.

Since June, the biggest banks bought about $127 billion of Treasuries, compared with $47 billion in the first half, according to the central bank. Commercial and industrial loans outstanding have fallen by about $68.5 billion this year, central bank data show.

Goldman Sachs Group Inc. backed the Fed’s plan after it drew criticism from officials in Germany, China and Brazil.

‘Misplaced Hostility’

The central bank’s actions will spur gross domestic product growth and reduce the risk of deflation, Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e- mail to clients.

“The widespread hostility to the Fed’s actions is misplaced,” Hatzius wrote. “Downside risks to the economic outlook have declined significantly. U.S. inflation is unlikely to become a problem for years.” Goldman Sachs is one of the 18 primary dealers authorized to trade directly with the Fed.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the securities, widened to 2.13 percentage points from this year’s low of 1.47 percentage points set in August. The five-year average is 2.09 percentage points.

Fund managers in a survey by Ried Thunberg ICAP Inc., a unit of the world’s largest inter-dealer broker, became less bearish on the outlook for U.S. bonds through the end of December.

Ried’s sentiment index rose to 47 for the seven days ended Nov. 5 from 45 the week before. A figure less than 50 indicates that investors expect prices to fall.

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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