Treasury 10-Year Yield Rises to Six-Month High on Global Recovery Outlook
President Barack Obama
Roger L. Wollenberg/Pool via Bloomberg
U.S. President Barack Obama’s agreement on Dec. 6 to extend tax cuts for two years boosted the outlook for the U.S. recovery.
U.S. President Barack Obama’s agreement on Dec. 6 to extend tax cuts for two years boosted the outlook for the U.S. recovery. Photographer: Roger L. Wollenberg/Pool via Bloomberg
Dec. 7 (Bloomberg) -- Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC, talks about the outlook for U.S. Treasuries and quantitative easing by the Federal Reserve. LeBas speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Treasuries dropped, pushing yields of benchmark 10-year notes to the highest level in six months, as optimism the global economic recovery is gathering pace sapped demand for safety.
Yields on German bunds rose above 3 percent for the first time since May, and Japanese five-year yields gained the most in more than two years. U.S. debt remained lower as the government sold $21 billion of 10-year notes two days after President Barack Obama agreed to extend his predecessor’s tax cuts. Yields on corporate and municipal debt surged.
“The carnage hasn’t stopped,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., one of the 18 primary dealers obligated to participate in government auctions. “The market got greedy” ahead of the Federal Reserve’s plan to buy Treasuries “and is paying for it as investors have been selling underwater longs for the last three weeks.” A long is a bet an asset will rise in value.
The 10-year Treasury note yield advanced 14 basis points, or 0.14 percentage point, to 3.27 percent at 5 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 fell 1 1/8, or $11.25 per $1,000 face amount, to 94 18/32.
The yield touched 3.33 percent, the highest level since June 4. It had earlier increased 36 basis points over two days, the most since Sept. 19, 2008, when Treasuries fluctuated following the bankruptcy of Lehman Brothers Holdings Inc. Two- year note yields climbed as much as 10 basis points today to 0.64 percent, the highest level since July 28.
Yield Curve
The extra yield investors demand to hold 10-year notes over 2-year debt increased to as much as 2.70 percentage points today, the widest spread since May 18.
At today’s 10-year note auction, the securities drew a yield of 3.340 percent, compared with the average forecast of 3.307 percent in a Bloomberg News survey of 7 primary dealers. The sale was a reopening of the Nov. 9 auction, which produced a yield of 2.636 percent.
Indirect bidders, a class of investors that includes foreign central banks, bought 44.4 percent of the notes, compared with 56.6 percent in November, the most since the Treasury began releasing the data in 2003. The average for the past 10 sales is 43.4 percent.
“Often in sell-offs like this, international buyers will step in and bail the market out, but it isn’t clear that they are willing to do that,” said Steve Rodosky, the head of Treasury and derivatives trading at Newport Beach, California- based Pacific Investment Management Co., which runs the world’s largest bond fund. “That has some in the market concerned.”
Bid-to-Cover
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.92. The average at the last 10 auctions was 3.12.
Yesterday’s $32 billion auction of three-year debt drew the lowest demand since February. The U.S. will sell $13 billion of 30-year securities tomorrow, completing this week’s $66 billion of note and bond sales.
Bonds fell for a second day after Obama agreed on Dec. 6 to the two-year extension of current tax rates in exchange for another 13 months of federal unemployment insurance for the long-term jobless and cutting the payroll tax by $120 billion for one year. The president said he would accept a lower rate for the estate tax than Democrats wanted in order to break a stalemate over extending George W. Bush’s tax cuts.
“It’s no doubt that this is more relief than most expected in the market, particularly with the payroll taxes,” said Russ Certo, a managing director and co-head of rates trading at Gleacher & Co. in New York. “A concept that is worth noting is higher rates could threaten the housing recovery. I don’t think it’s anyone’s intention to have higher rates cut off the benefits we are getting from the tax situation.”
Corporate Bonds
U.S. corporate bonds lost 0.76 percent yesterday, the most since May 7, according to Bank of America Merrill Lynch index data. The debt has declined 0.92 percent this month, paring this year’s gain to 10.87 percent. Company bond yields jumped 0.12 percentage point yesterday to 4.95 percent, the biggest increase since February 2009.
Signs that the global economic recovery is gathering pace helped to push down Build America Bond prices. The average yield on the taxable securities climbed yesterday to 6.35 percent, the most since Jan. 7, according to a Wells Fargo & Co. index.
The yield on the 10-year bund, Europe’s benchmark government security, gained seven basis points to 3.01 percent, after reaching 3.03 percent, the highest since May 4.
Japan’s five-year note yield jumped 10 basis points to 0.524 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The increase in yields was the biggest since June 11, 2008, Bloomberg data showed.
Break-Even Rate
The difference between yields on U.S. 10-year notes and those on Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities known as the break-even rate, increased today to as much as 2.29 percentage points, the widest since May 13.
The White House budget office projects the federal deficit this year will exceed $1.5 trillion, or 10.6 percent of gross domestic product, and will remain as high as $751 billion, or 3.9 percent of GDP, in five years.
“We believe the market’s getting back to fundamental values on the Treasuries,” said Andrew Harding, who helps manage $22 billion as chief investment officer for fixed income at PNC Capital Advisors LLC in Cleveland. “There’s plenty of Treasuries out there. And Treasuries at the end of the day aren’t collectibles. With that kind of a deficit, it will be very hard for the Fed to create scarcity value.”
The Fed bought $1.63 billion of inflation-protected securities today maturing from July 2012 to February 2040 as part of the asset-purchase program known as quantitative easing, aimed at lowering borrowing costs and stimulating the economy.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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