Treasuries Drop First Time in 3 Days; Gross Buying TIPS

Treasury 10-year notes fell for the first time in three days as the Group of 20’s endorsement of Japan’s stimulus measures bolstered speculation investors will continue to seek high-returning assets.

Bill Gross, manager of the world’s biggest bond fund, said he’s buying U.S. inflation-index bonds after the securities tumbled the most yesterday in more than a year following lower- than-average demand at the Treasury’s five-year auction. German Finance Minister Wolfgang Schaeuble said there was uniform recognition in the G-20 that Europe has made progress in stabilizing the euro. Yields on benchmark 10-year U.S. notes traded close to a four-month low they reached this week.

“Japan is buying on the long end, and we’ve seen diminished inflation expectations, which has brought people back into the market,” said Sean Murphy, a trader in New York at Societe Generale SA, one of 21 primary dealers that trade with the Federal Reserve. “We may be oversold, but for now we are stuck in the range.”

The U.S. 10-year yield rose two basis points, or 0.02 percentage point, to 1.71 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2023 fell 6/32, or $1.88 per $1,000 face value, to 102 21/32. The yield has fallen two basis points this week and reached 1.67 on April 17, the least since Dec. 12.

The benchmark yield traded below its 200-day moving average of 1.75 percent for a sixth straight day. Moving averages are indicators of momentum.

The Standard & Poor’s 500 Index (SXXP) advanced 0.9 percent, and the Stoxx Europe 600 Index gained 0.5 percent.

‘Buying TIPS’

Pacific Investment Management Co.’s Gross said he’s buying Treasury Inflation-Protected Securities after the debt fell the most since November 2011 yesterday as a record $18 billion five- year TIPS auction attracted the lowest demand in more than four years.

The 10-year break-even rate, a measure of inflation expectations derived from the difference between yields on conventional Treasuries and index-linked securities, declined to 2.25 percent yesterday, the lowest level since Sept. 4, after the auction. It closed at 2.32 percent today.

The drop in break-even rates is only temporary, according to Gross, manager of the $289 billion Total Return Bond Fund. Led by the Fed’s more than $2.5 trillion in stimulus since 2008, central banks around the world have injected about $5.3 trillion into the economies to sustain growth. All that extra cash is bound to eventually spark inflation.

“Buying TIPS,” Gross wrote in a Twitter message today. “Pimco expects higher” break-even rates, and “reserve countries need protection.”

‘Expensive Levels’

Treasuries due in a decade or more have been trading close to the most expensive levels since February relative to global peers with comparable maturities, according to Bank of America Merrill Lynch bond indexes.

Yields on Treasuries yesterday closed 33 basis points higher than those in an index of other sovereign debt. As recently as March 25, Treasuries traded 57 basis points higher than other sovereigns, the most since August 2011, the data showed. It traded at 32 basis points higher on April 15, the most expensive relative to peers since Feb. 26.

“We are at expensive levels,” said Christopher Sullivan, who oversees $2.2 billion as chief investment officer at United Nations Federal Credit Union in New York. “Equities are up, suggesting there may be better sentiment on risk. That may present additional pressure for Treasuries.”

Term Premium

The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, also shows Treasuries are almost at the most expensive level this year. The gauge was at negative 0.8 percent today, close to the negative 0.83 percent reached on April 15, the most expensive since Dec. 13. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

G-20 officials handed Japan leeway to reflate its stagnant economy. Meeting for the first time since the Bank of Japan (8301) unleashed new measures aimed at delivering 2 percent inflation within two years, they said today in Washington that those actions are “intended to stop deflation and support domestic demand.” They echoed their promise of February that nations will refrain from “competitive devaluation” and avoid “persistent exchange-rate misalignments.”

Schaeuble, speaking of the euro zone, said “the reforms that we’ve embarked upon and implemented are taking hold,” Yesterday’s vote in Germany’s parliament on the Cyprus bailout and maturity extensions for loans to Ireland and Portugal was “pretty relaxed and pretty safe” compared with earlier bailout votes in Germany’s parliament, he said.

The Fed bought $1.484 billion of Treasuries due from February 2036 to February 2043 today as part of its plan to put downward pressure on borrowing costs through asset purchases, known as quantitative easing.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; 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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