Treasuries rose, dropping 10-year yields below 2 percent for the first time in six days, after an unexpected decline in a gauge of U.S. consumer confidence cast doubt over the strength of the economic recovery.
Prices on the benchmark note increased for the first time in three days and yields snapped the longest streak above 2 percent in almost a year. The Treasury Department asked bond dealers today for information about positions in 10-year notes after a shortage of the securities developed in the repurchase- agreement market this month. Data showed China increased its holdings of Treasuries in January by the most since 2011.
“The confidence data is not good,” said Tom Simons, an economist in New York at Jefferies LLC, one of the 21 primary dealers that trade with the Federal Reserve. “If you looked at all the data this week, you would think that the economy was picking up a bit of momentum. There’s been one direction of data, and this is the first move in the other direction.”
Benchmark 10-year yields fell four basis points, or 0.04 percentage point, to 1.99 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The yields, which last held above 2 percent for five days on a closing basis in April 2012, declined five basis points this week. They reached 2.08 percent on March 8, the highest level since April 5.
The price of the 2 percent security due in February 2023 rose 11/32, or $3.44 per $1,000 face amount, to 100 3/32.
Trading volume fell for the first time in four days, declining 18 percent to $258 billion, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Average daily volume for the past year is $248 billion.
The Thomson Reuters/University of Michigan preliminary sentiment index for March fell to 71.8, the lowest level since December 2011, from 77.6 in February. The gauge was projected to increase to 78, according to the median estimate of 67 economists surveyed by Bloomberg.
The Treasury asked for information about positions in the benchmark 10-year, with a threshold of $2 billion, as of March 11. The on-the-run, or most actively traded 10-year note, came into short supply in the repo market that investors pay interest on cash lent to borrow the debt, resulting in negative repo rates. The Treasury sold an additional $21 billion of the notes on March 13.
The repo rate on the benchmark 10-year note closed with the lowest repo rate for all specific securities, at negative 2.95 percent on March 13, according to data from ICAP Plc, the world’s largest inter-dealer broker. The repo rate for the note opened yesterday at negative 2.8 percent and closed today at 0.02 percent. The overnight general collateral Treasury repurchase rate opened today at 0.25 percent.
Traders often short, or sell securities they’ve borrowed in the repo market ahead of a Treasury sale of new debt of similar maturity, to profit if prices of the notes fall after the auction. Typically, lenders of cash receive interest on those loans, represented by a positive repo rate.
Securities dealers use repos to finance holdings and increase leverage. Securities that can be borrowed at interest rates close to the Fed’s target rate, which is in a range of zero to 0.25 percent, are called general collateral. Those in highest demand have lower rates and are called “special.”
Futures traders bet 10-year notes will fall. Hedge-fund managers and other large speculators reversed from a net-long position to a net-short position in 10-year note futures in the week ending March 12, according to U.S. Commodity Futures Trading Commission data.
Speculative short positions, or bets prices will fall, outnumbered long positions by 57,346 contracts on the Chicago Board of Trade. Last week, traders were net-long 76,818 contracts.
Reports earlier this week showed U.S. retail sales climbed more than forecast and initial claims for jobless benefits unexpectedly fell. Ten- and 30-year yields reached 11-month highs on March 8 after the Labor Department said U.S. employers added 236,000 jobs last month, beating a forecast of 165,000.
“Treasuries are firmer amid an equity sell-off and the weak consumer data,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “Even with generally positive economic data, the back end has been surprisingly firm.”
Bonds rose today even after Fed data showed U.S. industrial production grew 0.7 percent in February, beating a forecast for a 0.4 percent gain, after a 0.1 decline the previous month.
A separate report showed the cost of living rose in February due to a jump in gasoline prices. The consumer-price index rose 0.7 percent, the Labor Department reported, with the biggest jump in gasoline prices in more than three years accounting for three-quarters of the advance.
A retreat in fuel expenses this month signaled inflation will hover around the Fed’s goal, giving the central bank more room to continue steps to spur growth and curb unemployment.
Treasury securities due in a decade or more are at the cheapest levels since 2011 relative to global peers with comparable maturities, according to the Bank of America indexes. Yields on Treasuries were 54 basis points higher than those in an index of other sovereign debt yesterday, the data showed. It was the most since August 2011.
“Seasonal economic stats should slow about now,” Gross wrote in the posting.
China, the largest foreign lender to the U.S., increased its holdings in Treasuries in January by $44.1 billion, or 3.6 percent, the biggest boost since June 2011, the Treasury Department reported. The country owns $1.2645 trillion of the debt, the most since September 2011. As of January, China held 11.4 percent of outstanding marketable U.S. government debt.
Japan, the second-biggest foreign lender, raised its holdings of U.S. government debt by $4 billion to $1.1152 trillion, the first increase since October. Japan holds 10 percent of outstanding Treasury debt.
Foreign holdings of Treasuries rose to $5.6165 trillion in January, a 0.8 percent increase from the previous month, the biggest since October. Foreign investors held 50.5 percent of the $11.1 trillion in U.S. debt outstanding then.
The Fed remains the largest holder of Treasuries, with a total of $1.767 trillion.
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