Treasury 10-Year Notes Decline Before $21 Billion Debt Auction

Treasury 10-year notes fell for the first time in three days with the U.S. set to sell $21 billion of the securities an hour before minutes of the Federal Reserve’s last policy meeting are scheduled to be released.

Yields on the benchmark securities were at almost the highest level since 2011 relative to two- and 30-year debt, reflecting reduced demand for 10-year notes versus the other two. Bonds extended losses after inventories at U.S. wholesalers unexpectedly dropped as sales surged. Federal Reserve Chairman Ben S. Bernanke is scheduled to speak on economic policy after the central bank releases the minutes of its June meeting.

“The economy is going to get better and that will mean higher rates,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. The wholesale report was “another bullish sign for the economy. Now inventories are going down and sales are jumping. It means they are going to build inventories going forward.”

The benchmark 10-year yield rose three basis points, or 0.03 percentage point, to 2.66 percent at 12:01 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.75 percent note maturing in May 2023 fell 9/32, or $2.81 per $10,000 face value, to 92 3/32. The yield climbed to 2.75 percent on July 8, the highest level since August 2011.

Treasuries handed investors a loss of 3.4 percent this year through yesterday, Bloomberg World Bond Indexes show.

Cheapest Level

The butterfly spread, which measures differences between the yields of the three maturities of debt, was 1.25 percentage points after increasing to 1.39 percentage points last week, the most since July 2011.

Treasuries due in a decade or more are at almost the cheapest level in more than two years relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on U.S. debt were 82 basis points higher than those in an index of other sovereign debt on July 9. The yields were 85 basis points higher on July 5, the most since March 2011.

Treasuries extended losses earlier after a 0.5 percent decrease in wholesalers stockpiles that was the biggest since September 2011 and which followed a 0.1 percent drop in April that was initially reported as a gain, the Commerce Department said in Washington. The median forecast in a Bloomberg survey called for a 0.3 percent increase. Sales jumped 1.6 percent, the most since November.

Direction ‘Uncertainty’

“We’ve been trading along these low 2.6 percent levels -- there’s a little bit of uncertainty to the direction, given the 10-year supply versus Bernanke,” said Sean Murphy, a trader in New York at Societe Generale SA, one of 21 primary dealers that trade directly with the Fed.

Investors bid for 2.53 times the amount of debt offered at the previous 10-year note sale on June 12, the least since August at the monthly auctions.

Indirect bidders, the investor class that includes foreign central banks, purchased 51.7 percent of the securities, the most since December 2011. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11.7 percent, the least since September.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.05 percentage points. The spread has narrowed from this year’s high of 2.61 percentage points on Feb. 4.

Chart ‘Congestion’

“Today’s 10-year sale comes before Bernanke’s speech and the Fed minutes, so expectations should be reduced,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “The big level is at 2.85 percent, where there is a lot of congestion on the charts. Investors are being discouraged as there is not the stability that they want.”

A $32 billion sale of three-year notes yesterday drew a yield of 0.719 percent, the highest since June 2011. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.35, versus 2.95 at the previous auction.

The government is also scheduled to auction $13 billion of 30-year bonds tomorrow in the final of its note and bond sales this week.

Fed Policy

Bernanke is scheduled to speak on economic policy at 4:10 p.m. in Boston. Yields surged when he told reporters after a two-day policy meeting on June 19 that the Fed may begin to slow its $85 billion in monthly bond purchases this year and end them in 2014. Minutes of that meeting will be released at 2 p.m. in Washington.

Fed Bank of San Francisco President John Williams said critics including Nobel laureate Paul Krugman, who say the central bank hasn’t done enough to stimulate growth, disregard how bond buying is an untested tool with an ambiguous impact.

“The claim that the Fed is responding insufficiently to the shocks hitting the economy rests on the assumption that policy is made with complete certainty about the effects of policy on the economy,” Williams said in a paper posted yesterday on the website of the San Francisco Fed. “Nothing could be further from the truth.”

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

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

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