Treasuries dropped, pushing 10-year yields up from almost three-week lows, as claims for jobless benefits unexpectedly fell to a five-year low and the U.S. sold $15 billion in inflation-indexed debt at negative yields.
The auction, which drew a yield of negative 0.63 percent, was the seventh 10-year Treasury Inflation Protected Security sale since January 2012 to yield below zero as investors seek refuge from inflation amid the Federal Reserve’s efforts to prop up the economy that pushed its balance sheet beyond $3 trillion for the first time this week. U.S. government debt declined earlier as applications for unemployment insurance payments decreased to the least since January 2008, the Labor Department said today.
“You want to have some presence in TIPS,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “It’s a negative return that can turn into a positive nominal yield if inflation runs ahead of current expectations.”
Conventional 10-year note yields increased three basis points, or 0.03 percentage point, to 1.85 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader prices, after rising as high as 1.87 percent. The price of the 1.625 percent note due in November 2022 fell 7/32, or $2.19 per $1,000 face amount, to 97 31/32.
Treasury trading volume rose today to $304 billion in New York, the highest level since Jan. 17, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Daily volume averaged $240 billion in 2012.
The Fed pushed its balance sheet beyond $3 trillion for the first time this week while undertaking open-ended purchases of Treasuries and mortgage-backed securities to combat 7.8 percent unemployment.
The Fed’s total assets climbed by $48 billion in the past week to $3.01 trillion as of Jan. 23, according to a release from the central bank today in Washington. Holdings of Treasuries climbed by $7.8 billion while mortgage-backed securities in the Fed portfolio rose by $35.6 billion.
In today’s auctions, indirect bidders, a group that includes foreign central banks, bought 53.3 percent of the amount sold today, compared with 48.3 percent in the prior auction and an average of 42.3 percent for the past 10 auctions.
“There’s high demand for some protection -- it tells you people are willing to pay a lot for that protection,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “If you are a foreign central bank and you’ve got lots of U.S. dollars to invest, TIPS make more sense. At least you have some protection against inflation.”
The bid-to-cover ratio, which compares the number of bids with the amount of securities sold, was 2.71, compared with 2.52 at the previous sale and the highest since 3.01 at the May 2012 auction. Primary dealers bought 35.4 percent, compared with 41.3 in the previous sale. Direct bidders purchased 11.3 percent.
The yield on current 10-year Treasury Inflation Protected Securities was little changed at negative 0.76 percent, compared with the all-time low auction yield of negative 0.75 percent reached on Sept. 20.
Initial claims for jobless benefits decreased by 5,000 to 330,000 in the week ended Jan. 19, the fewest since the same week in 2008, the Labor Department reported today in Washington. Economists forecast 355,000 claims, according to the median estimate in a Bloomberg survey.
The swings in claims may reflect challenges adjusting the data during the holiday period and at the start of quarters. This year’s changes are following patterns seen in prior years, a Labor Department spokesman said.
The Fed’s five-year five-year forward break-even rate, which gauges the predicted pace of consumer-price increases from 2018 to 2023, is 2.84 percent. That’s up from 2.43 percent at the start of September, and compares with an average of 2.55 percent in the six months before the central bank announced on Sept. 13 it would expand its monthly asset purchases by adding $40 billion of mortgage securities.
The difference between 10-year yields on regular U.S. government securities and TIPS, known as the 10-year break-even rate, was 2.53 percentage points compared with the 2.48 percentage point average since the Fed announcement. That compares with a 2.22 percentage point average in the six months before the announcement. The average over the past decade is 2.19 percentage points.
The Fed bought $3.357 billion in Treasuries today maturing from February 2020 to November 2022 as part of its strategy of purchasing $85 billion of government and mortgage debt each month to put downward pressure on borrowing costs.
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