Treasuries Fall After Retail Sales Exceed Forecast

Treasuries fell, pushing 10-year yields toward an 11-month high, after sales at U.S. retailers increased in February by the most in five months, fueling investor appetite for higher-yielding assets.

The rise in yields may help bolster demand at today’s government auction of $21 billion of 10-year notes. The benchmark notes are the highest in demand, or on “special” in the repurchase-agreement, or repo, market, where firms borrow and lend securities. Traders were willing to pay to borrow the securities in exchange for loaning cash.

Treasury yields dropped yesterday for the first time in seven days after climbing last week as stronger-than-forecast U.S. economic data damped demand for the refuge of bonds.

“The number on retail sales looks pretty good,” said Larry Milstein, managing director in New York of government-debt trading a R.W. Pressprich & Co. “The numbers came in pretty solid. We’re softer on Treasuries as you would expect, but we remain in this band.”

Ten-year yields rose three basis points, or 0.03 percentage point, to 2.04 percent at 12:04 p.m. New York time, according to Bloomberg Bond Trader data, after falling earlier to 2 percent. They increased to 2.08 percent on March 8, the highest level since April 5. The price of the 2 percent security maturing in February 2023 declined 7/32, or $2.19 per $1,000 face amount, to 99 5/8.

The yield on the 10-year note needs to test 2.1 percent before investors look toward consistently higher levels, Milstein said.

Repo Rate

Today’s auction, a reopening of the February 10-year note sale, is the second of three note and bond offerings this week totaling $66 billion.

The current 10-year note closed today at the lowest repo rate, negative 2.95 percent. Traders often short, or sell securities they’ve borrowed in the repo market, before a Treasury sale to profit if prices of the securities fall after the auction.

“Before the reopenings, you tend to see the 10-year trade pretty special in repo markets,” said Aaron Kohli, an interest- rate strategist at BNP Paribas SA in New York, which as one of the Federal Reserve’s 21 primary dealers is required to bid at U.S. debt auctions. “What happens is that people are buying up a lot of the 10-year, and then those who want to short it or sell it are having difficulty borrowing it.”

The 10-year notes being sold today yielded 2.045 percent in pre-auction trading. At the last offering of the debt on Feb. 13, which drew a yield of 2.046 percent, investors submitted bids for 2.68 times the amount of debt available, versus an average of 2.92 at the previous 10 sales.

The government is scheduled to sell $13 billion of 30-year bonds tomorrow.

‘Hard Time’

“The bond market will have a hard time going up” in price, said Charles Comiskey, head of Treasury trading at the primary dealer Bank of Nova Scotia in New York. “The last couple of economic data we got have been better.”

Ten-year yields climbed the most in almost a year last week as data showed American companies added 236,000 more jobs in January versus the 165,000 forecast by economists.

Retail sales rose 1.1 percent, more than forecast, following a revised 0.2 percent gain in January, Commerce Department figures showed today in Washington. The median forecast in a Bloomberg survey was for a 0.5 percent advance. Sales excluding automobiles and gasoline climbed 0.4 percent, versus a forecast for a gain of 0.2 percent.

Stronger Demand

Treasuries advanced yesterday amid stronger-than-forecast demand at a $32 billion auction of three-year notes. The securities yielded 0.411 percent, below the average forecast of 0.413 percent in a Bloomberg News poll of seven primary dealers.

Treasuries have lost 1 percent this year, according to Bank of America Merrill Lynch indexes. German government securities have declined 0.7 percent, the indexes show.

Treasury securities due in a decade and more are trading at almost the cheapest level since 2011 relative to global peers with similar maturities, Bank of America Merrill Lynch indexes show. Yields on the Treasuries were 54 basis points higher on March 8 than those in an index of other sovereign debt due in 10 years and more, based on the data. It was the most since August 2011. The spread was 52 basis points yesterday.

Yields will decline to 1.86 percent by March 31 and rise to 2.31 percent by year-end, according to the weighted average forecast in a Bloomberg survey of economists.

Volatility Fell

Volatility as measured by the Bank of America Merrill Lynch MOVE index dropped yesterday to 53.7 basis points, the lowest since Jan. 23. The gauge, which tracks the outlook for swings in U.S. government debt rates, has averaged 66.2 basis points over the past year.

The Fed purchased $1.46 billion today in Treasuries due from February 2036 to February 2043. The U.S. central bank has been buying $85 billion of Treasury and mortgage bonds each month under the quantitative-easing stimulus strategy since the start of the year. The effort is designed to try to hold down borrowing costs and encourage economic growth.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net

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

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