Treasuries fell, extending last week’s decline, with investors reluctant to speculate on the prospects of the U.S. economy as the presidential race heads into its final two weeks with polls showing a dead heat.
Benchmark 10-year note yields traded up from their 200-day moving average before data this week forecast to show durable- goods orders rose in September and growth accelerated in the third quarter. President Barack Obama and Republican challenger Mitt Romney are tied at 47 percent in a national poll of likely voters before a televised debate tonight. The Treasury is scheduled to sell $99 billion of two-, five- and seven-year notes starting tomorrow.
“The perceived notion of some folks is that if Romney wins, the Fed may be more reluctant to buy Treasuries come the end of the year,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Federal Reserve. The opposite perception is that, “if the president wins, there would be less concern that the Fed would step back from buying. A part of this is also a concession for the auctions.”
The 10-year yield climbed five basis points, or 0.05 percentage point, to 1.81 percent at 4:59 p.m. New York time after dropping seven basis points on Oct. 19, according to Bloomberg Bond Trader prices. The 1.625 percent note due August 2022 fell 14/32, or $4.38 per $1,000 face amount, to 98 10/32.
The yield climbed as high as 1.815 percent, above the 200- day moving average of 1.805 percent.
Treasury volume reported by ICAP Plc, the largest inter- dealer broker of U.S. government debt, dropped to $204 billion, the lowest level since Oct. 15. It has averaged $243 billion in 2012. It touched a high this year of $464 billion in September.
Volatility reached 68.5 basis points as of Oct. 19, below this year’s average of 72.5 basis points, according to the latest data available from Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options. It touched 57.5 basis points on Sept. 19, the least since May 7. The average over the past decade is 99.66 basis points.
U.S. government securities traded close to the least expensive levels in two months. The 10-year term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, was negative 0.76 percent, equaling the least costly since Aug. 21. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.75 percent.
“There’s a reasonable argument that says Romney gaining momentum is bad for Treasuries and good for risky assets,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It’s more of a risk-on sentiment.”
Romney has said he won’t reappoint Fed Chairman Ben S. Bernanke when his second four-year term ends January 2014. The presidential election is Nov. 6.
The Treasury is scheduled to auction $35 billion of two- year notes tomorrow, the same amount of five-year debt the following day and $29 billion of seven-year securities Oct. 25.
The previous auction of $35 billion of 2-year notes on Sept. 25 yielded 0.273 percent. The yield on the security climbed to 0.31 percent today, the highest since June 29.
“If we can maintain these yield levels, then the auctions will go well,” said Dan Mulholland, head of U.S. Treasury trading in the capital-markets unit of BNY Mellon Corp. in New York.
The Fed’s policy-setting committee will begin a two-day meeting tomorrow. The central bank in September unveiled an open-ended plan to buy $40 billion a month of mortgage debt in a third round of asset purchases known as quantitative easing to boost the economic recovery.
All 21 primary dealers expect the Fed’s latest QE measures to be expanded to include government securities as gains in U.S. employment and consumer confidence prove unsustainable, according a survey last week by Bloomberg.
“A Romney win could potentially lead to a tighter Fed,” Mulholland of BNY Mellon said. “There’s also the unwillingness of investors to commit to the market without knowing what’s happening with the fiscal cliff.”
Economic output would shrink by 0.5 percent next year, and joblessness climb to about 9 percent if the so-called fiscal cliff isn’t averted, according to the Congressional Budget Office. The fiscal cliff refers to $607 billion in U.S. federal spending cuts and tax increases scheduled to take effect in January unless the U.S. Congress acts.
Durable goods orders increased 7.2 percent last month, after falling 13.2 percent in August, according to a Bloomberg News survey before the Oct. 25 Commerce Department report. The department will say on Oct. 26 that gross domestic product expanded at a 1.9 percent annual pace in the three months ended Sept. 30, up from 1.3 percent the previous quarter, a separate survey showed.
As data appear to improve, Obama and Romney are tied at 47 percent in a national NBC News/Wall Street Journal poll of likely voters released yesterday. A Quinnipiac University/CBS News poll of likely Ohio voters released today showed Obama leading Romney by five percentage points, 50 percent to 45 percent.
The central bank purchased $1.89 billion of debt maturing in February 2036 to May 2042 as part of its Operation Twist program to replace shorter-term debt in its portfolio with longer-dated securities in an effort to boost the economy.
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