Treasuries Fall for Second Day as Sales Gain Fuels Bets on Fed

Treasuries fell for a second day as a higher-than-forecast jump in U.S. retail sales in November added to speculation the Federal Reserve will reduce bond buying as soon as next week amid an improving economy.

Five-year note yields climbed to the highest level in almost three months after data showed sales climbed. Reports last week showed gains in employment and manufacturing. The Fed meets Dec. 17-18. Thirty-year (USGG30YR) bonds declined after the government sold $13 billion of the securities at the highest yield in more than two years.

“We had decent data this morning that has weighed on Treasuries, as it’s a positive for growth prospects and Fed tapering,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers required to bid at auctions. “The economy is turning around. Tapering is priced in, and it’s going to be harder to sell off from here unless there is surprising news from the Fed.”

Five-year note yields rose three basis points, or 0.03 percentage point, to 1.53 percent at 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. They touched 1.54 percent, the highest since Sept. 18. The price of the 1.25 percent securities maturing in November 2018 dropped 5/32, or $1.56 per $1,000 face amount, to 98 21/32.

‘Under Pressure’

“The belly is under pressure,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “When things look like the economy is better than expected, that’s where the pain is going to be.”

Ten-year (USGG10YR) yields rose two basis points to 2.88 percent. Thirty-year bond yields added one basis point to 3.89 percent after falling earlier to 3.86 percent. They reached 3.96 percent on Dec. 6, the highest since August 2011.

The long-bond auction’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.35, compared with 2.16 at the previous offering and an average of 2.42 at the past 10 auctions.

The securities yielded 3.9 percent, versus the 3.901 percent average forecast in a Bloomberg News survey of six primary dealers. It was the highest sale yield since July 2011.

“We are in a very anxious period, and people are very uncertain about where the Fed is going to be and how they are going to get there,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “Until we get further notice, the market is in a guessing game.”

Volatility Rises

A gauge of Treasuries volatility, the Bank of America Merrill Lynch MOVE Index, rose for a third day to 72.8 basis points, above the 71.5 average of the year.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 26 percent to $350 billion, from $278 billion yesterday. The average this year is $312 billion.

The Fed buys $85 billion of Treasuries and mortgage bonds a month to push down borrowing costs and spur economic growth.

Minutes of policy makers’ Oct. 29-30 meeting, released Nov. 20, said they expected economic data to show improvement in the labor market and “warrant trimming the pace of purchases in coming months.”

The central bank has held its benchmark interest-rate target at zero to 0.25 percent since 2008 to support the economy. Fed Chairman Ben S. Bernanke said last month the rate will probably stay low long after bond buying ends.

At the auction today, indirect bidders, a class of investors that includes foreign central banks, bought 46 percent of the bonds, the most since April 2011, compared with 35.3 percent at the November sale. The average at the past 10 offerings was 38.4 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 12.5 percent of the offering, versus 18.3 percent at last month’s sale. The average for the past 10 auctions is 15.8 percent.

‘Strong’ Indirects

“The auction was somewhat weak, but not that bad,” said Aaron Kohli, an interest-rate strategist in New York at the primary dealer BNP Paribas SA. “We did see strong indirect demand. But investors are willing to wait for better levels.”

Investors bid $2.87 for each dollar of the $2.028 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 sale was the final of three note and bond offerings this week. The U.S. sold $30 billion of three-year debt on Nov. 12 at a yield of 0.631 percent and $21 billion of 10-year securities yesterday at a yield of 2.824 percent.

The Treasury said it will sell $96 billion in notes next week: $32 billion in two-year debt, $35 billion in five-year (USGG5YR) securities and $29 billion in seven-years. It will also auction $16 billion in five-year inflation-indexed debt on Dec. 19.

Retail Sales

U.S. retail sales increased 0.7 percent, the most since June, after rising 0.6 percent in October, more than previously reported, Commerce Department figures showed today in Washington. The median forecast of 83 economists surveyed by Bloomberg called for a 0.6 percent advance. Excluding cars, sales rose 0.4 percent, also more than projected.

The jobless rate fell to a five-year low of 7 percent in November, employers added 203,000 jobs and manufacturing expanded at the fastest pace in more than two years, other data this month showed.

Treasuries’ losses today were tempered by a report showing initial claims for jobless benefits in the U.S. rose more than forecast last week.

Applications for U.S. unemployment benefits jumped to 368,000, more than forecast, from an almost three-month low of 300,000, highlighting the difficulty in adjusting the data around the year-end holidays.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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

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