Treasury Five-Year Notes Near Cheapest Since 2010 on Fed

Treasuries fell as reports showed initial jobless claims were lower than forecast last week and a manufacturing index expanded, adding to speculation the Federal Reserve will raise interest rates at some point next year.

Five-year notes traded at the cheapest since 2010 versus two- and 10-year securities amid speculation economic growth will lead the central bank to continue to cut its bond-buying program. The U.S. sale of $18 billion of five-year Treasury Inflation Protected Securities attracted the most demand since December 2012, while the divergence from nominal five-year securities pushed break-even rates to the most since March 19.

“The data shows a significant bounce back in activity,” said Carl Riccadonna, senior U.S. economist in New York at Deutsche Bank AG, one of 22 primary dealers that are required to bid at the auctions. “A lot of the more bearish forecasters are saying maybe the weather was more than we thought and therefore the economy is stronger. You see the reaction in the market with interest rates backing up.”

Benchmark 10-year yields rose seven basis points, or 0.07 percentage point, to 2.70 percent at 12:18 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.75 percent note due in February 2024 lost 20/32, or $6.25 per $1,000 face amount, to 100 13/32. The yield has gained seven basis points this week and touched 2.59 percent on April 15, the least since March 3.

U.S. five-year yields rose seven basis points to 1.72 percent The yield on the 30-year bond climbed five basis points to 3.49 percent.

Holiday Pause

Trading of U.S. government securities is scheduled to close at 2 p.m. in New York and stay shut tomorrow for Good Friday, according to the Securities Industry & Financial Markets Association. On April 21, trading will stop at 3 p.m. in Japan and remain closed during London hours for the U.K.’s Easter Monday. The market will open as usual in the U.S. on April 21.

Treasuries due in 10 years and longer have gained 2 percent this month and 9.4 percent this year, according to Bloomberg U.S. Treasury Bond Index data. The broader Treasury market has advanced 0.6 percent this month and 2.3 percent this year, according to index data.

After investors pulled $10.3 billion in March out of government bond Exchange Traded Funds, the biggest exodus since December 2010, investors have returned to U.S. debt funds, with inflows off $403 million in April, data compiled by Bloomberg show.

TIPS Sale

The Treasury’s $18 billion sale of five-year inflation-indexed notes drew a yield of negative 0.213 percent, compared with a projection of negative 0.162 percent, according to the average forecast in a Bloomberg News survey of five of the Fed’s primary dealers. The sale had a bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, of 2.70, compared with the average 2.62 at the past 10 sales.

The difference in yields on five-year notes and inflation-protected debt, known as the break-even rate, rose as much as eight basis points to reach 1.94 percentage points.

The U.S. will sell $96 billion in notes next week. The Treasury is scheduled to sell $32 billion in two-year notes, $35 billion in five-year debt and $29 billion in seven-year securities on three consecutive days starting April 22.

The butterfly spread, the five-year note versus two- and ten-year debt, was 35 basis points, the highest in four years, with the increase reflecting waning demand for the middle security versus the other two.

Yellen View

Fed Chair Janet Yellen said yesterday the central bank is committed to policies that will support the recovery. Fed policy makers are unwinding the bond-buying program they have used to support the economy. They have kept their target for overnight lending between banks in a range of zero to 0.25 percent since 2008.

“She was very, very intentional about explaining her vision for the approach to adapting fed policy to economic performance,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, referring to Yellen. “The fives will be the first place to cheapen as the Fed looks to tighten.”

Futures prices put the likelihood the Fed will start raising rates in July 2015 at 69 percent yesterday, based on trading on the CME Group Inc.’s exchange. The chances for a raise increase in June 2015 fell to 47 percent, compared with 54 percent on April 4.

The Philadelphia Fed’s factory index rose to 16.6 this month, exceeding the 10 forecast in a Bloomberg News survey. Readings greater than zero signal growth in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Economic Reading

Jobless claims increased by 2,000 to 304,000 in the week ended April 12 from a revised 302,000 the prior period that was the lowest since September 2007, a Labor Department report showed. The median forecast of 47 economists surveyed by Bloomberg called for an increase to 315,000.

The Standard & Poor’s 500 Index of stocks rose 0.2 percent as Goldman Sachs Group Inc. earnings exceeded forecasts.

“With a combination of this morning’s earnings and jobless claims, we’ve seen a slight backup in yields,” said Shyam Rajan, an interest-rate strategist at primary dealer Bank of America Corp. “Our forecast is for five-year yields to go higher.”

The difference between five- and 30-year yields earlier touched 1.75 percentage points, the lowest since 2009.

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.

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 Paul Cox

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