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U.S. 10-year Note Falls a Fifth Day, Longest Drop Since August

Treasury 10-year notes fell for a fifth day, the longest decline in 11 months, as the U.S. sold $21 billion of the securities and global stocks rallied, damping demand for the safest assets.

The offering drew a 3.119 percent yield, compared with a forecast of 3.109 percent in a Bloomberg News survey of eight of the Federal Reserve’s 18 primary dealers. The U.S. will sell $13 billion of 30-year bonds tomorrow.

“The auction is consistent with the idea that rates should be backing up a bit from here, especially out the curve,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse Group AG, which as a primary dealer is obligated to bid in Treasury sales. “The long end got a little carried away in the flight-to-quality trade and equities are doing better, which is putting further pressure on Treasuries.”

The yield on the benchmark 10-year note rose 7 basis points to 3.13 percent, the highest level since June 25, at 4:35 p.m. in New York, according to BGCantor Market Data. The last time the yield increased for five days was the period ended Aug. 7. Thirty-year bond yields increased 6 basis points to 4.11 percent, also the highest since June 25. A basis point is 0.01 percentage point.

Today’s auction was the second of three note and bond sales this week totaling $69 billion. The yield was the lowest since a 10-year note offering in April 2009. The bid-to-cover ratio, which compares total bids with the amount of securities offered, was 3.09, versus an average of 3.03 for the previous 10 sales.

Foreign Central Banks

Indirect bidders, an investor class that includes foreign central banks, purchased 41.7 percent of the notes, compared with an average of 40.7 percent for the past 10 sales. Direct bidders, non-primary-dealer investors who place their bids directly with the Treasury, bought 9.8 percent, compared with a 12.4 percent average for the past 10 offerings.

The Treasury sold $35 billion in three-year debt yesterday at 1.055 percent, the lowest yield on record at an auction of the security.

The Standard & Poor’s 500 Index extended its longest winning streak in three months, advancing for a sixth day and gaining 1.5 percent.

“People are taking on more risk,” said Tom Roth, senior Treasury trader in New York at Mitsubishi UFJ Financial Group Inc. “There’s less fear and that cuts demand, but there is still solid demand for Treasuries.”

Budget Gap Narrows

The U.S. budget deficit narrowed in June compared with the same month last year as the economic recovery brought in more tax revenue. The excess of spending over receipts fell to $68.4 billion from $94.3 billion in June 2009, Treasury data showed. For the fiscal year to date, the deficit was $1 trillion, compared with $1.42 trillion in the prior year to date.

“We’re holding our bias to see 10-year yields test the 3.18 to 3.21 percent zone this month without a great deal of struggle,” David Ader, head of government bond strategy in Stamford, Connecticut, at CRT Capital Group LLC, wrote in a note to clients. “There is a possibility of a move toward the large volume bulge from June between 3.26 percent and 3.30 percent.”

The 10-year yield will climb to 3.36 percent by year-end, according to a Bloomberg survey of banks and securities companies’ projections, with the most recent forecasts given the heaviest weightings.

Fed Minutes

The Federal Open Market Committee will release minutes tomorrow of its rate meeting last month. The central bank cited slowing inflation in its June 23 policy statement while reaffirming it foresaw a “moderate” pace of growth. It held the benchmark interest rate at a record low range of zero to 0.25 percent.

“The market will pay a lot of attention to the Fed minutes to see if there is any mention of the possibility of more quantitative easing,” said Suvrat Prakash, an interest-rate strategist in New York at primary dealer BNP Paribas SA, referring to stimulus programs. “Inflation is still low, so rates hikes are still pushed into the future.”

A gauge of trader expectations for consumer prices, the difference between yields on 10-year notes and Treasury Inflation Protected Securities, was 1.89 percentage points today, compared with this year’s high of 2.49 percentage points in January. The consumer price index slid 0.1 percent in June after also falling in May and April, economists in a Bloomberg survey forecast the government will report on July 16.

Futures traders are betting the outperformance of longer-term Treasuries relative to those with shorter maturities will persist as the economy expands with few signs of inflation.


The number of contracts hedge funds and other large speculators hold betting on a decline in two-year notes outnumbers those counting on gain for the first time in over a year, according to Commodity Futures Trading Commission data as of July 6. The so-called net short position for 10-year notes has decreased by more than half since April.

The data “shows a strong move toward curve-flattening in the Treasury futures market,” John Brady, senior vice president with the interest rates product group at MF Global Ltd. in Chicago, wrote with a group of analysts in a July 12 note.

The difference in yield between 2- and 10-year notes narrowed to 2.27 percentage points on July 1, the least since October expectations for inflation fell. It reached a record 2.94 percentage points on Feb. 18. The yield curve widened 4 basis points today to 2.46 percentage points.

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