The difference between yields on 10-and 30-year Treasuries was almost the least in three years on speculation subdued inflation will boost demand at the government’s auction of $13 billion in long bonds.
The yield spread was 90 basis points, or 0.90 percentage point, after shrinking to 87 basis points in September, the least since June 2010. European Central Bank President Mario Draghi strengthened the European Central Bank’s pledge to keep interest rates low as long as necessary as officials try to keep the region’s economic recovery on track. The U.S. will sell 30-year securities at 1 p.m.
“People are going into yield-grab mode because of the slowing down of Federal Reserve purchases and inflation is low,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “Draghi talked about prolonged periods of low growth. It means the Fed can’t be as aggressive.”
The benchmark 10-year yield was little changed at 2.99 percent at 12:13 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.75 percent note maturing in November 2023 was 97 31/32. The 30-year yield traded little changed at 3.90 percent.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, climbed to $424.1 billion yesterday, the highest level since Dec. 19, and above the 2013 average of $308.4 billion.
The Fed’s preferred inflation measure has been below its 2 percent target for 19 months. The personal consumption expenditures index, showed prices rose 0.9 percent in the 12 months ended in November, the Commerce Department said Dec. 23. The gauge hasn’t been above 2 percent since April 2012.
Pacific Investment Management Co.’s Bill Gross said investors should focus on shorter-maturity debt as the slow pace of inflation signals the Fed’s benchmark rate will remain at almost zero until at least 2016.
“Bond prices -- especially those at the front end of the yield curves, say one to five years, are critically dependent on the future level of fed funds, not the glide path of the almost preordered Fed taper,” of its bond purchases, Gross, manager of the world’s biggest bond fund, wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website.
The previous auction of 30-year bonds on Dec. 12 drew a yield of 3.90 percent, the highest level at the monthly sales since July 2011.
“We would see some concession ahead of the auction today, but even with better economic data, the concerns in Europe and lack of inflation should help the auction,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors.
The bid-to-cover ratio, which gauges demand by comparing the amount of bids with the amount offered, climbed to 2.35 times last month from 2.16 in November. Indirect bidders, the investor group that includes foreign central banks, purchased 46 percent of the securities, the most since April 2011. The bonds being offered today yielded 3.90 percent in pre-auction trading.
Treasuries fell yesterday after minutes of the Fed’s December policy meeting boosted speculation the central bank will keep reducing bond purchases as the economy recovers. The Treasury auctioned $21 billion of 10-year notes yesterday and $30 billion of three-year debt on Jan. 7
U.S. 30-year bonds lost 15.1 percent last year and 10-year notes dropped 7.8 percent, according to Bank of America Merrill Lynch indexes, as the Fed prepared to taper its bond buying. Policy makers are cutting purchases to $75 billion a month from $85 billion starting this month.
U.S. companies boosted payrolls last month by more than economists forecast, a report from ADP Research Institute showed yesterday. The Labor Department will say tomorrow employers added 197,000 workers in December, versus 203,000 the previous month, the median estimate of economists surveyed by Bloomberg shows. The unemployment rate will remain at 7 percent, based on the responses.
“We are range-bound as the market is pricing in a jobs report of more than 200,000 new jobs,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade with the Fed and are required to bid in U.S. debt auctions. “It will take a big miss one way or another to stray from these yield levels.”
Ten-year yields will rise to 3.4 percent by Dec. 31, according to Jennifer Vail, head of fixed-income research at Minneapolis based U.S. Bank Wealth Management, which oversees $112 billion. That matched the 3.4 percent level in a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weighting.
“We do expect more strength in the labor market and the broader economy, and the Fed has reserved the right to speed up taper if they need to, which means higher rates,” she said.
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