Treasuries Fall Before Fed Meeting, $111 Billion Debt Auctions

Treasuries fell, pushing the 10-year yield up from almost a two-month low, before the Federal Reserve begins a two-day meeting tomorrow and the U.S. sells $111 billion of notes and floating-rate debt this week.

The benchmark yield increased for the first time in three days after dropping last week amid demand from investors fleeing emerging-market losses. The Treasury will sell $15 billion of floating-rate two-year notes in an inaugural sale on Jan. 29 offering its first added security in 17 years. At its meeting this week, the Fed may add cuts to its monthly $75 billion bond-buying program, according to a Bloomberg News survey.

“The Fed will cut $10 billion at every meeting if the economy stays where it is right now,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of 21 primary dealers that trade with the Fed. “We’re going to drift higher as we have supply coming up,” he said referring to yields.

The U.S. 10-year yield climbed three basis points, or 0.03 percentage point, to 2.74 percent as of 9:10 a.m. in New York, according to Bloomberg Bond Trader prices. The yield dropped to 2.70 percent on Jan. 24, the lowest since Nov. 26. The 2.75 percent note due November 2023 fell 7/32, or $2.19 per $1,000 face amount, to 100 2/32.

Bill Rates

The one-month bill rate rose one basis point to 0.07 percent. The rate added five basis points last week, reaching the most on a closing basis since Oct. 27, amid concern about congressional maneuvering before a debt-limit vote. Three-month bill rates were little changed at 0.05 percent, the highest level since Jan. 7.

Treasuries headed for the biggest monthly advance since May 2012, returning 1.4 percent as of Jan. 24 after falling 1.1 percent in December, according to the Bloomberg U.S. Treasury Bond Index. (BUSY) The securities climbed last week as emerging-markets losses and signs of slower U.S. economic growth led investors to seek safer assets.

Treasury trading volume at ICAP Plc, the largest interdealer broker of U.S. government debt, rose to $474.8 billion on Jan. 24, the most since Jan. 10. Bank of America Merrill Lynch’s MOVE Index, which measures Treasury volatility, advanced to a two-week high of 63.51 on the same day.

The Fed will cut its purchases in $10 billion increments over the next six gatherings before announcing an end to the program no later than December, according to the median forecasts of economists in a Bloomberg survey Jan. 10. The central bank’s monetary stimulus has pushed its balance sheet to $4.1 trillion, from $2.9 trillion at the beginning of last year.

Yield Outlook

“The downside on U.S. yields is starting to look limited,” said Jan Von Gerich, a fixed-income strategist at Nordea Bank AB in Helsinki. “Bond yields have come down a long way. The Fed still remains on course for more tapering.”

The 10-year note yield will rise to 3.37 percent by Dec. 31, according to the weighted-average estimate in a Bloomberg survey of analysts.

New home sales dropped 1.9 percent in December after sliding 2.1 percent a month earlier, according to the median estimate of economists surveyed by Bloomberg News. Data tomorrow will show bookings for goods meant to last at least three years rose 1.8 percent last month after a revised 3.4 percent gain in November, analysts in a separate survey predicted.

Citigroup Inc.’s U.S. Economic Surprise Index, which shows whether data beat or fell short of economists’ forecasts, declined to 62.50 on Jan. 23, the lowest since Jan. 7.

Floating Rates

The Treasury will auction five- and seven-year notes on Jan. 30, the first time it will conduct two fixed-coupon debt sales in a single day since October 2008. It will also sell $32 billion in two-year fixed-rate notes tomorrow.

The floating rate notes to be sold offer investors a short-term instrument that’s a hedge against a potential rise in interest rates. The securities are considered short term because they are benchmarked to a short-term index -- the high rate from a 13-week bill. The rate at which interest will accrue on the notes will be re-set daily.

The government will offer $717 billion of notes and bonds in 2014 on a net basis, 14 percent less than last year, according to a survey of primary dealers, which are obligated to bid at Treasury auctions.

“If the economy picks up as we expect and tax receipts improve further above what the Treasury is expecting, we could see further cuts in issuance,” Brett Ryan, U.S. economist at Deutsche Bank AG, one of the 21 primary dealers that trade with the Fed, said in a telephone interview from New York. “Monetary policy was trying to ease the drag. We’re getting very close to point where we are in a sustainable growth phase.”

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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

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