Treasury Bonds Fall as Yield Curve Widens From Least Since 2009

Treasury 30-year bonds fell, widening the gap between yields on the securities and five-year notes from the least since 2009, as investors embraced a strengthening economy amid Federal Reserve stimulus withdrawal.

The long bonds dropped for the first time in three days as U.S. consumer confidence rose to the highest level in six years. The gap between the maturities, or yield curve, narrowed last week after Fed Chair Janet Yellen said the central bank’s debt-buying program may end this year with the first interest-rate increase coming six months after that. The U.S. sold $32 billion of two-year notes at the highest auction yield since May 2011.

“The first hike is likely 12 months or so away still -- you can only price so much in so soon,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the U.S. central bank. “The front end started to be fully priced for some of those hikes next year. We had gotten to levels where it also made sense to just book some profits.”

The 30-year bond yield rose three basis points, or 0.03 percentage point, to 3.59 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 3.625 percent note due in February 2044 fell 17/32, or $5.31 per $1,000 face value, to 100 19/32.

Yields on current two-year notes fell one basis point to 0.43 percent, while those on five-year securities were little changed at 1.73 percent, and those on benchmark 10-year notes added two basis points to 2.75 percent.

Yield Curve

Treasury trading volume declined 3 percent to $363 billion from $376 billion yesterday, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Volume rose to $582.4 billion on March 13, the highest in more than nine months, according to ICAP.

The extra yield 30-year Treasuries offer over five-year securities widened for the first time in three days, reaching 1.89 percentage points after dropping to 1.83 percentage points, the narrowest since October 2009. The spread has averaged 2.23 percentage points over the past five years.

The gap between the yields on two-year notes and the 30-year bond widened to as high as 3.18 basis points after touching 3.12 basis points, the narrowest since July. Yields on two-year notes rose eight basis points last week, the most since June.

A yield curve plots the rates of bonds of the same quality, but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously. Longer-term bonds tend to rise or fall based on the outlook for inflation, while shorter maturities are anchored by the Fed’s policy rate.

Fed Funds

“Investors pulled forward short-term rates expectations, which pushed up yields at the short end,” said Dan Greenhaus, chief global strategist in New York at BTIG LLC. “Longer-term rates are subject to a number of other factors that have not shifted, for instance growth and inflation.”

Yellen suggested March 19 that policy makers may increase the federal funds rate, which banks charge each other for overnight loans, in the middle of 2015.

The central bank’s debt-buying program, which it used to support the economy by putting downward pressure on interest rates, may end this year and the first rate increase may come six months after that, Yellen said. Fed board members cut its monthly bond purchases to $55 billion last week, from $85 billion in 2013.

Yellen ‘Pleased’

The odds policy makers will increase the rate to 0.5 percent or more by January are about 16 percent, based on futures contracts. They were 11 percent a month ago.

Yellen “has to be reasonably pleased with what happened, because 10-year yields didn’t go up, mortgage rates didn’t go any higher, the stock market’s holding in OK,” said Donald Ellenberger, who oversees about $10 billion as head of multi-sector strategies at Federated Investors in Pittsburgh. “The short end has repriced higher in yield, but I don’t think she’s really too worried about that.”

Even as the Fed withdraws stimulus and debates a rate increase, inflation continues to lag. The five-year, five-year forward break-even rate, which projects consumer-price increases from 2019 to 2024, fell to 2.39 percent yesterday, the lowest level since June.

Confidence Rises

The Conference Board’s index of U.S. consumer confidence rose to 82.3 in March from 78.3 a month earlier, the New York-based private research group said today. It was the highest reading since January 2008. The median forecast in a Bloomberg survey of 76 economists called for a reading of 78.5 this month. Estimates ranged from 75 to 80.

Another report today showed home values in 20 cities advanced in the year through January at the slowest pace since August. Prices climbed 13.2 percent from January 2013 after rising 13.4 percent in the 12 months ended in December, according to the S&P/Case-Shiller index.

Treasuries due in one to three years yielded six basis points more than same-maturity non-U.S. sovereign debt as of yesterday, based on Bank of America Merrill Lynch data. The difference was the most since April 2010. It was negative as recently as last week.

At today’s auction, the securities drew a yield of 0.469 percent, compared with a forecast of 0.471 percent in a Bloomberg News survey of seven of the Fed’s 22 primary dealers.

‘Pretty Well’

The auction “went pretty well,” said Greenhaus of BTIG. “It was not great, but clearly the backup in yields was met with somewhat strong demand.”

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 3.2, compared with 3.3 at the past 10 auctions.

Indirect bidders, an investor class that includes foreign central banks, purchased 40.9 percent of the notes, the highest since November 2011, compared with an average of 26.7 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 14.7 percent of the notes at the sale, compared with an average of 21.5 percent for the past 10 auctions.

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

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Kenneth Pringle, Paul Cox

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