Treasury 10-Year Yields Rise Most This Year as Investor Risk Demand Climbs
Treasury 10-year note yields rose the most this year after fewer Americans than forecast filed for unemployment benefits and demand for U.S. debt as a refuge eased following successful bond auctions by Spain and France.
Even with investor demand for riskier asset rising, the Treasury sold $15 billion of 10-year inflation-indexed notes at a negative yield for the first time. The difference in yields between two- and 10-year notes widened to 175 basis points, the most since Dec. 12.
“We are seeing a flight away from Treasuries into riskier assets,” said Ian Lyngen, a strategist at CRT Capital Group LLC in Stamford, Connecticut. “The dramatic drop in jobless claims reflects a healing job market and the job situation is the one part of the recovery that had been missing so far.”
Yields on 10-year notes rose eight basis points, or 0.08 percentage point, to 1.98 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 fell 23/32, or $7.19 per $1,000 face amount, to 100 6/32. Two-year note yields rose one basis point to 0.23 percent. Thirty-year bond yields increased eight basis points to 3.04 percent.
The 10-year yield earlier rose 10 basis points, the most since Dec. 20.
Jobless claims plunged by 50,000 to 352,000 in the week ended Jan. 14, the lowest level since April 2008, the Labor Department said. Greece began a second day of talks with its creditors to reach an accord to lower its debt, reducing concern Europe’s debt crisis may worsen.
Corporate Offerings
Goldman Sachs Group Inc. sold $4.5 billion of bonds, while Citigroup Inc. and Bank of America Corp. plan offerings, as lenders lock in reduced borrowing costs amid a rally in their debt.
“The corporate supply adds pressure on Treasuries as it’s just more supply that has to be digested in the market,” said Sean Murphy, a Treasury trader in New York at Societe Generale, one of the 21 primary dealers that are required to bid at Treasury auctions. “The market is more comfortable dipping into risk assets right now.”
Treasury Inflation Protected Securities, or TIPS, rise or fall in value tracking changes in the consumer price index calculated by the Labor Department. Inflation adjustments will be added to the notes’ principal and be payable at maturity. Today’s auction was sold at a so-called high yield of negative 0.046 percent.
‘Solid’ Auction
“The auction was solid across the board at record low yields,” said Aaron Kohli, an interest-rate strategist in New York BNP Paribas, a primary dealer. “There is concern about potential inflation going forward. Broadly, the core of U.S inflation remains very strong, and that is positive for the TIPS market.”
The cost of living in the U.S. was little changed in December for a second month. The unchanged reading in the consumer-price index reported by the Labor Department today in Washington compared with a median forecast of a 0.1 percent gain, according to a Bloomberg News survey of 78 economists.
The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.91 higher than the average of 2.79 for the past 10 sales.
Indirect bidders, a class of investors that includes foreign central banks, purchased 36.3 percent of the securities, compared with 41.46 percent at the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 13.4 percent of the sale, versus 9.67 percent of the last 10 auctions.
Break-Even Rate
The last offering of 10-year TIPS, an $11 billion sale on Nov. 17, drew a yield of 0.099 percent.
The difference between yields on U.S. 10-year notes and TIPS, a gauge of expectations for inflation over the life of the debt known as the break-even rate, was 2.10 percentage points. The average over the past decade is 2.13 percentage points.
TIPS returned 14 percent in 2011, versus 9.8 percent for conventional Treasuries, according to Bank of America Merrill Lynch index data.
“The global economic outlook will remain challenged,” William O’Donnell, head U.S. government-bond strategist in Stamford, Connecticut, at Royal Bank of Scotland Plc’s RBS Securities primary dealer unit, wrote in a note to clients. “We advocate that longer-term investors use back-ups to reload on longs,” or bets bonds will gain.
The Fed bought $4.9 billion of notes due from January 2018 to November 2019. The central bank is replacing $400 billion of shorter-maturity Treasuries including TIPS in its holdings with longer-term debt to cap borrowing costs under a plan announced in September.
Spain, Greece
Next week’s government auctions include $35 billion of two- year notes on Jan. 24, the same amount of five-year debt on the following day and $29 billion of seven-year securities on Jan. 26, according the Treasury department.
Spain sold 6.61 billion euros ($8.5 billion) of bonds, compared with a maximum target of 4.5 billion euros, while French yields fell to 1.05 percent from 1.58 percent in October at its auction of 2014 notes.
Greece’s government and private creditors headed into a second day of talks in a push to reach an accord that would reduce the nation’s debt and avert a collapse of the economy.
“There is more optimism on a Greece deal, good auctions in Spain and France, and the economic data was generally good across the board, which is weighing on Treasuries,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “Still, we will need a lot more positive news here and abroad to get us much higher in yield.”
To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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