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Treasury Yields Rise From Three-Month Low Before Auction

Treasury 30-year bonds fell for the first time in five days as investors balked at buying the debt with yields at three-month lows before a government auction of $16 billion of the securities.

Yields on the longest-maturity U.S. government security remain below the 3.41 percent average of the past year as investors continue to seek a refuge from turmoil in European sovereign-debt and credit markets. The Treasury sold $24 billion of 10-year notes yesterday at a record low auction yield.

“Treasuries have come off the highs ahead of today’s bond auction,” said Richard Bryant, a trader in New York at Mizuho Securities USA Inc., one of 21 primary dealers that are required to bid at government-debt auctions. “The question is, will there be enough concession to distribute the bond at these levels?”

The 30-year yield rose six basis points, or 0.06 percentage point, to 3.09 percent at 11:52 a.m. New York time, according to Bloomberg Bond Trader prices. The 3.125 percent bond due in February 2042 fell 1 3/32, or $10.94 per $1,000 face amount, to 100 27/32.

The yield dropped to 2.98 percent yesterday, a level last seen on Feb. 2.

Ten-year note yields climbed four basis points to 1.90 percent after rising as many as nine basis points, the biggest gain since April 3. Yields dropped to 1.79 percent yesterday, the lowest level since Jan 31.

Swap Rates

“Yields are already low and we have a third auction,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford Connecticut. “We haven’t really garnered any more dramatic information about Europe.”

The difference between the 10-year swap rate and the yield on similar-maturity U.S. debt narrowed for the first time in three days to 12.44 basis points. It widened yesterday to as much as 18 basis points, the most since December. Swap rates are usually higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk. Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

The 30-year bonds being sold today yielded 3.10 percent in pre-auction trading, compared with 3.23 percent the previous time the government sold the securities on April 12.

‘Dive Into Duration’

Investors bid for 2.76 times the amount of debt offered last month, versus the average of 2.67 percent for the past 10 auctions. Indirect bidders, the investor group that includes foreign central banks, purchased 30.7 percent.

“People are going to dive into duration a bit right now,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “It’s out of necessity. Situations out there are very tenuous.”

Demand for a refuge from Europe’s turmoil helped the U.S. sell the 10-year notes at 1.855 percent yesterday, a record low for an auction. Ten-year yields dropped to 1.67 percent on Sept. 23, the least ever.

The U.S. sold $32 billion of three-year notes May 8 at a yield of 0.365 percent. This week’s sales will raise $35.3 billion of new cash as maturing securities held by the public total $36.7 billion, according to the U.S. Treasury.

Treasuries have returned 0.6 percent this year, including reinvested interest, Bank of America Merrill Lynch indexes show. They returned 9.8 percent in 2011 as the European financial crisis deepened.

Top Forecaster

“European investors are looking for alternative safe havens where they can earn a little bit more and it’s coming into the Treasury market,” FTN Financial Chief Economist Christopher Low, the most accurate forecaster of Treasury note yields last year, said yesterday. “The combination of low growth and low inflation is beneficial for bonds everywhere, including U.S. Treasuries.”

Low was the only one among 70 analysts in a Bloomberg survey who predicted the yield would fall to 2 percent by the end of last year.

“It’s likely that the U.S. 10-year Treasury yield will work itself down to 1.5 percent by year-end,” said Low, who is based in New York.

As Greece faces political paralysis, a survey of 1,253 Bloomberg subscribers showed 57 percent of investors, analysts and traders predicted at least one country will abandon the euro by year-end. Political leaders remained divided on forming a new government, stoking concern another election may set the stage for the country’s exit from the currency union.

Jobs Data

The 10-year yield will meet resistance should it fall to the Jan. 31 low of 1.7901 percent, according to data compiled by Bloomberg. Resistance refers to the level where orders to sell a security may be grouped.

Jobless claims dropped by 1,000 to 367,000 in the period ended May 5, in line with the median forecast in a Bloomberg News survey and the lowest since the end of March, the Labor Department said today in Washington. The number of people on unemployment benefit rolls was the smallest since July 2008.

The government announced today it would auction $13 billion of 10-year Treasury Inflation Protected Securities on May 17.

The Federal Reserve sold $8.636 billion in notes due from October 2013 to January 2014 today as part of a program known as Operation Twist. The sales are part of the central bank’s effort to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to hold down borrowing costs.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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