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Treasuries Fall Before $32 Billion 3-Year Sale Amid Fed Bets

Treasuries declined before the government sells $32 billion of three-year notes amid speculation the Federal Reserve may reduce its bond-purchase program by year-end.

The difference between yields on five-year securities and 10-year notes widened to the most in almost two years as a report showed the U.S. trade deficit narrowed in June to the lowest level since October 2009. The U.S. is scheduled to sell $24 billion of 10-year notes tomorrow and $16 billion of 30-year bonds the following day.

“The market has built in a decent concession out the curve and we’re back to fairly attractive levels,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “Supply is the main focus of the week.”

The benchmark 10-year yield climbed two basis points, or 0.02 percentage point, to 2.66 percent at 12:05 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2023 dropped 6/32, or $1.88 per $1,000 face amount, to 92 7/32.

Thirty-year bond yields climbed three basis points to 3.75 percent, touching almost the highest since August 2011.

Yield Difference

The gap between yields on five-year notes and 10-year Treasuries touched 1.26 percentage points today, reaching the widest since September 2011. Historically, a steeper so-called yield curve reflects investors anticipating faster economic growth.

The three-year notes being sold today yielded 0.64 percent in pre-auction trading. The previous three-year auction, on July 9, drew bids for 3.35 times the amount of debt offered, up from 2.95 times on June 11. The yield was 0.719 percent, the highest level since June 2011.

Indirect bidders, the investor class that includes foreign central banks, bought 35.6 percent of the securities last month, the most at the monthly auctions since September.

“There’s definitely still strong demand at auctions,” said Dan Greenhaus, chief global strategist in New York at broker-dealer BTIG LLC. “We think they will still go, but the August jobs report is going to be crucial,” he said referring to speculation on Fed cut-backs on its stimulus program this year.

Treasury Returns

Investors in U.S. government securities have lost 2.8 percent this year, according to the Bloomberg U.S. Treasury Bond Index. (BUSY) U.S. debt gained 2 percent in 2012.

The securities have lost 3.3 percent in the past three months, according to the index. Fed Chairman Ben S. Bernanke told Congress May 22 that the Fed may cut the pace of bond purchases if policy makers see indications of sustained growth. Ten-year yields have climbed from 2.04 percent on that day.

The Fed is buying $45 billion of Treasuries and $40 billion of mortgage debt each month to put downward pressure on interest rates, including $5.65 billion in Treasuries maturing between May 2018 and April 2019 today.

Tapering of bond-buying “may be delayed if Yellen has a big vote,” Pacific Investment Management Co.’s Bill Gross wrote today in a note on Twitter, referring to Janet Yellen, the Fed’s vice chairman.

Policy makers are discussing whether the economy has improved enough for them to start reducing the purchases. The central bank’s large-scale asset purchases, known as quantitative easing, have swelled its balance sheet to more than $3.5 trillion.

Economic Reading

The U.S. trade deficit shrank to $34.2 billion from a revised $44.1 billion in May that was smaller than previously estimated, the Commerce Department reported in Washington. The median forecast in a Bloomberg survey of 72 economists called for a $43.5 billion deficit. Exports increased to an all-time high while imports fell to a three-month low.

Treasuries investors were neutral this week, as the percentage of short bets that prices of the securities will fall equaled bets prices will rise, according to a survey by JPMorgan Chase & Co.

The percentage of investors in the survey betting that Treasury prices will drop rose to 15 percent in the week ending yesterday, up from 11 percent the previous week. An equal amount of 15 percent was also long, down from 17 percent of investors the previous week. A long position is a bet prices will increase. About 70 percent of the clients surveyed by the primary dealer were neutral, just below the 72 percent in the previous week.

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

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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