Treasuries Drop for First Time in 3 Days as Safety Demand Fades
Treasuries declined for the first time in three days as refuge demand waned on speculation a Russian proposal for Syria to put its chemical weapons under international control will avert a U.S. military strike.
Notes fell even after an auction of $31 billion in three-year debt drew a lower-than-forecast yield. Ten-year yields approached 3 percent after reaching that level last week for the first time since 2011 amid bets the Federal Reserve will trim its $85 billion-a-month in asset purchases at a meeting next week. Verizon Communications Inc. prepared to issue as much as $50 billion of debt to take full control of its wireless unit.
“We’ve seen a lot of response to the headlines today that has caused very choppy trading,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 21 primary dealers obligated to bid at Treasury auctions. “We are in the midst of trying to find a new range for rates. We should see higher yields, but at a slow pace.”
Ten-year yields climbed five basis points, or 0.05 percentage point, to 2.96 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data, and reached 2.97 percent. They closed yesterday at 2.91 percent. They touched 3.005 percent Sept. 6, the highest since July 2011. The price of the 2.5 percent note due in August 2023 dropped 14/32, or $4.38 per $1,000 face amount, to 96 1/32.
Yields on current three-year notes rose four basis points to 0.89 percent after touching 0.98 percent on Sept. 6, the highest level since May 2011. They averaged 0.45 percent over the past year.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased 43 percent to $349 billion. The figure is down from a 2013 high of $662 billion on May 22 and up from a low of $148 billion on Aug. 9. The 2013 average is $315 billion.
Thirty-year bond yields increased four basis points to 3.89 percent and touched 3.9 percent. They briefly declined one basis point to 3.84 percent.
The long-bond yields may have fallen as dealers sold more of the securities than necessary to lock in protection from interest-rate volatility as Verizon prepared to sell bonds, leading to an unwind of some of the Treasury sales, said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.
Verizon, which controls the largest U.S. wireless carrier, is planning an eight-part, dollar-denominated initial offering this week that may exceed Apple Inc.’s record $17 billion sale in April, according to a person with knowledge of the matter. The debt is for a $130 billion transaction to acquire full control of Verizon Wireless, the most profitable U.S. mobile carrier, from Vodafone Group Plc.
“The Syrian concerns have receded and the market is back to focusing on tapering and dealing with the added duration issues from the Verizon deal, all of which are combining to give us somewhat higher yields,” said Scott Graham, Chicago-based head of government-bond trading at Bank of Montreal’s BMO Capital Markets unit, a primary dealer. “The three-year note auction benefited from the steep selloff and higher yields we’ve seen in that sector.”
The notes sold at today’s auction yielded 0.913 percent, compared with a forecast of 0.920 percent in a Bloomberg News survey of six primary dealers. The yield was the highest in a three-year debt sale since May 2011. The Treasury cut the size of today’s offering from $32 billion, which had been the monthly auction amount since October 2010.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 3.29, versus 3.21 at the August sale and an average ratio of 3.36 at the past 10 offerings.
Indirect bidders, an investor class that includes foreign central banks, purchased 33.1 percent of the notes sold today, compared with an average of 27.4 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 20 percent of the notes, the most since March. The average at the past 10 auctions was 19 percent.
Investors bid $2.88 for each dollar of the $1.474 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.
The U.S. is scheduled to sell $21 billion in 10-year notes tomorrow and $13 billion of 30-year bonds on Sept. 12.
Treasuries fell earlier on the proposal to avoid U.S. military action in Syria. Russia urged the Middle East nation to turn over its arsenal of chemical weapons to international control. The plan offers a possible diplomatic solution after an Aug. 21 chemical attack the U.S. and allies say was carried out by Syrian President Bashar al-Assad’s forces.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index was 101.81 today, the seventh consecutive day above 100, the longest stretch since November 2011. It touched a two-month high of 114.19 on Sept. 5. The average over the past year is 67.71.
Bonds gained yesterday on speculation that Sept. 6 data showing lower-than-forecast job growth may prompt the Fed to be less aggressive in curbing stimulus this month.
Fed Chairman Ben S. Bernanke and his colleagues will decide at their Sept. 17-18 meeting to reduce purchases of Treasuries to $35 billion from $45 billion while maintaining mortgage-bond buying at $40 billion, according to the median of 34 responses in a Bloomberg News survey of economists on Sept. 6. Policy makers are discussing whether the U.S. economy has improved enough to start reducing the purchases.
Demand for safety also waned today as data showed China’s industrial output grew at the fastest pace in 17 months. It rose 10.4 percent in August from a year earlier, the National Bureau of Statistics said in a statement in Beijing today.
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