U.S. Three-Year Notes Drop First Time in Three Days Before Treasury Sale
Treasury three-year notes fell for the first time in three days, pushing yields up from the lowest since November, before the U.S. sells $32 billion of the debt in the first of three note and bond auctions this week.
Benchmark 10-year notes were little changed after surging earlier as concern Europe’s debt crisis may spread stoked demand for U.S. government debt’s safety even as U.S. lawmakers failed to agree on a deficit plan three weeks before the government exhausts its borrowing authority. Stocks pared earlier losses and Spanish and Italian bonds erased declines.
“The market is spinning its wheels, waiting for news on Europe, and meanwhile we still have to deal with the looming supply,” said Sean Murphy, a Treasury trader at Societe Generale SA in New York, one of the 20 primary dealers that trade with the Federal Reserve. “The market is not going to be very excited buying auctions near these levels, but the European situation isn’t going away, so we should stay near these levels until there is news.”
Yields on the three-year note rose three basis points, or 0.03 percentage point, to 0.63 percent at 11:30 a.m. in New York, Bloomberg Bond Trader prices show. They fell earlier six basis points to 0.55 percent, the lowest since Nov. 9. The price of the 0.75 percent security due in June 2014 decreased 2/32, or 63 cents per $1,000 face amount, to 100 11/32.
The 10-year note yield fell as much as 11 basis points to 2.81 percent, the lowest since Dec. 1, before trading little changed at 2.91 percent. One-month bill rates were little changed at 0.01 percent.
Three-Year Sale
The three-year notes scheduled for sale today yielded 0.672 percent in pre-auction trading, compared with 0.765 percent at the previous sale of the securities on June 7.
Investors bid last month for 3.28 times the amount of three-year debt offered. The average ratio for the past 10 auctions is 3.14. Indirect bidders, which include foreign central banks, bought 35.6 percent of the notes sold in June, versus an average of 34.7 percent at the past 10 auctions.
Three-year notes have returned 2.2 percent this year, compared with a gain of 3.5 percent for Treasuries overall, according to Bank of America Merrill Lynch indexes.
President Barack Obama said yesterday at a White House press conference he’ll continue to press congressional leaders for “the largest possible deal” on a package of deficit cuts as he seeks to raise the $14.3 trillion federal debt ceiling before the U.S. exhausts its borrowing authority on Aug. 2.
Obama said he won’t sign a short-term extension of the debt limit and plans to continue meeting with members of Congress every day until an acceptable agreement is reached.
Likely ‘Soft’
“This week’s auctions are likely to prove soft given the drop in yield over the last two sessions, which have created a negative concession,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “With the debt ceiling looming, that will restrain some of the buyers out there.”
The U.S. plans to auction $21 billion of 10-year debt tomorrow and $13 billion of 30-year bonds on July 14. The sizes are unchanged from the last time the U.S. offered the maturities in June.
The U.S. trade deficit widened in May to the highest level in almost three years, Commerce Department data showed today in Washington, reflecting a surge in crude oil imports. The gap grew 15 percent to $50.2 billion, exceeding the forecasts of all 73 economists surveyed by Bloomberg News and the biggest since October 2008. Exports held near April’s record.
The Fed will release minutes of its June meeting at 2 p.m.
‘ECB Will Intervene’
Riskier assets cut losses today as former Bank of England policy maker Willem Buiter said the European Central Bank will revive its bond-buying program to safeguard this week’s auction of Italian bonds.
“The ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday,” Buiter, now chief economist at Citigroup Inc., told reporters in London today. “If the ECB doesn’t come in, the Italian bond auction is likely to fail.”
The MSCI World (MXWO) Index of stocks was down 0.2 percent after earlier tumbling 1.3 percent. The Standard & Poor’s 500 Index gained 0.2 percent after falling as much as 0.3 percent.
The yield curve, the difference between two- and 10-year Treasury note yields, flattened for a sixth straight day, the longest since May. It decreased to 2.53 percentage points, down from a high this year of 2.93 percentage points on Feb. 7.
Inflation Expectations
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, was little changed at 2.30 percentage points. It reached a high this year of 2.67 percentage points in April. The 10-year average is 2.1 percentage points.
Spanish and Italian government 10-year bond yields reached 13-year highs before erasing today’s increases and falling as European Union Economic and Monetary Affairs Commissioner Olli Rehn said a consensus had been reached on private investors’ role in solving Greece’s debt crisis.
“The economic backdrop is still weak, but the primary force driving the markets is the European spread widening and tightening,” said Thomas Tucci, head of U.S. government bond trading at Royal Bank of Canada’s RBC Capital Markets unit in New York. The firm is obligated as a primary dealer to participate in U.S. debt auctions. “These types of environments are not too good for auctions; unless we build in a significant discount, the auction may be tenuous today.”
To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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