Treasuries Auction Seen at Record Low on Refuge Demand
Treasury five-year notes are poised to draw a record low yield at today’s $35 billion auction as U.S. government debt retains its status as the premier haven for investors from global financial market turmoil.
Ten-year note yields fluctuated and remained within a quarter-percentage point of the record low of 1.44 percent set June 1 before the start tomorrow of a two-day European Union summit. A report showed orders for durable goods rose more than forecast in May. The Federal Reserve bought $1.98 billion of longer-term Treasuries today in its Operation Twist program.
“People are fairly doubtful that will we get something substantial on the European front, and with the Fed’s extension of Twist it’s doubtful rates will shoot higher any time soon, so we should see a well-bid auction,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of 21 primary dealers that are required to bid at U.S. debt auctions. “The market is going to continue to trade within a very narrow range until something changes.”
The 10-year note yield was little changed at 1.63 percent at 11:51 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent security maturing in May 2022 traded at 101 3/32. Thirty-year bond yields were little changed at 2.69 percent.
U.S. government debt returned 3.2 percent this quarter through yesterday, according to Bank of America Merrill Lynch indexes, as economic growth ebbed and European leaders struggled to resolve their fiscal crisis. The MSCI All-Country World Index of stocks handed investors an 8.9 percent loss including reinvested dividends.
The five-year notes being sold today yielded 0.734 percent in pre-auction trading, compared with 0.748 percent at the previous offering on May 23, which was a record low. Investors bid for 2.99 times the amount offered last month, versus 3.09 times in April.
“There is no clarity on Europe, and for the most part people are just keeping their powder dry to see what happens at the European summit,” said Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York, said in a telephone interview. “Expectations for a positive outcome are quite low, and that is keeping a bid in the market. Nothing is getting done until Germany says something is going to get done.”
Five-year Treasuries have returned 1.9 percent this quarter, versus 0.1 percent for two-year notes and 14 percent for 30-year bonds, the Bank of America indexes show.
The U.S. government also plans to sell $29 billion of seven-year debt tomorrow. It auctioned $35 billion of two-year securities yesterday.
Bookings for durable goods rose 1.1 percent, the first increase in three months, a Commerce Department report showed today in Washington. The median forecast of 76 economists surveyed by Bloomberg News called for a 0.5 percent gain. Excluding the volatile transportation equipment category, orders for goods meant to last at least three years advanced 0.4 percent.
Treasuries remained little changed as data showed more Americans than forecast signed contracts to purchase previously owned homes in May.
The index of pending home resales climbed 5.9 percent to 101.1, matching a two-year high reached in March, after a 5.5 percent decline in April, figures from the National Association of Realtors showed. The median forecast of 39 economists surveyed by Bloomberg News called for a 1.5 percent gain in May.
Volatility declined for a seventh day yesterday, the longest stretch since March, according to Bank of America Merrill Lynch’s MOVE index. The gauge fell to 71.1 basis points, the lowest level in almost a month. The index measures price swings based on options.
A valuation measure showed the benchmark notes trading at almost the most expensive level ever. The term premium, a model created by economists at the Fed, was at negative 0.86 percent, after reaching a record negative 0.94 percent June 1 as investors sought refuge from Europe’s debt turmoil.
A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is 0.50 percent.
“Treasuries are clearly overvalued, but this condition can persist as long as the level of uncertainty does,” GMP Securities’ Miller said.
The Fed purchased Treasuries today due from February 2036 to May 2042 as part of its effort to spur the economy by capping borrowing costs, according to the Fed Bank of New York’s website. The program is called Operation Twist.
The central bank last week extended the plan, originally set to replace $400 billion of shorter maturity Treasuries in its holdings with longer-term debt through June, by $267 billion through the end of 2012.
The 10-year yield is consolidating within a range of 1.55 percent to 1.75 percent established since June 6, according to data compiled by Bloomberg.
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