Treasuries Fall on Economy, Apple Speculation Before Fed Meeting

Treasuries fell for the first time in a week before Federal Reserve policy makers begin a two-day meeting tomorrow at which they are forecast find enough economic improvement to further scale back stimulative bond purchases.

U.S. debt fell as a planned bond sale by Apple Inc. that may rival the size of its $17 billion offering last year squeezed the Treasury market on speculation underwriters sold government debt to hedge interest-rate risk on the sale. Treasuries pared losses after report that European Central Bank President Mario Draghi told German lawmakers that quantitative easing wasn’t imminent. The U.S. said it would pay down the most debt in seven years as labor-market strength helps boost tax revenue.

“It’s a combination of better data and a payback for the relentless rally we’ve seen in longer-term rates,” said Shyam Rajan, an interest-rate strategist at Bank of America Merrill Lynch in New York, one of the 22 primary dealers that trade with the Fed. “Corporate supply concerns are definitely weighing on the longer-end of the curve.”

Benchmark 10-year yields climbed four basis points, or 0.04 percentage point, to 2.70 percent at 5 p.m. in New York, based on Bloomberg Bond Trader prices, the first rise in six days. The 2.75 percent note due in February 2024 fell 10/32, or $3.13 per $1,000 face amount, to 100 13/32.

Yield Changes

While the 10-yield was more than a full percentage point from the record-low 1.379 percent reached in July 2012, it was still below its 10-year average of 3.45 percent.

Thirty-year bond yields rose four basis points to 3.49 percent. The yield dropped to 3.42 percent on April 25, the lowest level since July 3.

“The back end is under pressure,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “There’s some rate-lock selling. The market may be preparing itself for the Apple supply.”

Apple said in an April 23 statement that its financing this year may rival the size of the offering 12 months ago, which was the largest corporate sale on record at the time.

The U.S. is scheduled to sell $15 billion in floating-rate notes tomorrow. The Treasury is projected to announce on April 30 the amounts it will sell in three-, 10- and 30-year debt on three consecutive days starting May 6.

Budget Shifts

The drop in net marketable debt will be $78 billion in the April-June period, $38 billion more than the paydown projected three months ago, with an end-of-June cash balance of $130 billion, the Treasury said today in Washington. The improvement will be short lived -- net borrowing of $169 billion is projected next quarter, with $130 billion in cash Sept. 30.

A faster pace of hiring and soaring corporate profits are lifting tax receipts while spending increases at a slower pace. That’s helping shrink a budget deficit projected this year to be the smallest as a share of the economy since 2007.

The nation’s budget deficit will narrow to $492 billion this year, about a third of its 2009 record level of $1.4 trillion, the Congressional Budget Office said on April 14. Next year, the gap will decline further, to $469 billion, the nonpartisan agency said. The 2014 deficit will be 2.8 percent of gross domestic product, according to CBO, compared with 4.1 percent of GDP in 2013.

The Treasury may begin cutting the sizes of its two- and three-year fixed-rate note auctions again this quarter, probably starting with the May auction of two-year notes and the June auction of three-year notes, according to Wrightson. Bills may see a net redemption of $60 billion for the quarter, according to Wrightson.

Bond Returns

The Bloomberg Global Developed Sovereign Bond Index (BGSV) has risen 1 percent in April. It is up 3.7 percent in 2014, or triple the 1.1 percent gain from the MSCI All-Country World Index of shares, which includes reinvested dividends. Treasuries maturing in 10 years or longer have gained 2 percent this month and 9.4 percent this year, according to Bloomberg U.S. Treasury Bond Index data.

The difference between two- and 30-year yields narrowed to 2.99 percentage points on April 25, the least since June. The spread was 3.05 percentage points today.

Thirty-year bonds have rallied in April on the outlook for subdued inflation, while shorter-term notes lagged behind on speculation the Fed will raise interest rates at some point next year. Turmoil in Ukraine increased demand for the relative safety of U.S. debt.

The yield difference between 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was little changed at 2.19 percentage points. That compares with an average of 2.21 percentage points over the past decade.

Fed Meeting

Fed policy makers will end their two-day meeting April 30 and is expected to keep its main policy-rate target unchanged. They are forecast to cut monthly purchases to $45 billion, from $55 billion.

Employers in the U.S. added 215,000 workers this month, the most since November, analysts project a May 2 report from the Labor Department will say. The unemployment rate fell to 6.6 percent from 6.7 percent, according to the median forecast in a separate Bloomberg survey. That figure would match January’s as the lowest since October 2008.

“This is not a great yield to have if you believe the economy is picking up,” said Peter Osler, head of rates strategy at broker Marex Spectron Group Ltd. in London. “A view in the market is that we are in the economic uptrend and yields should head higher.”

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; 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, Greg Storey

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