Treasury Seven-Year Note Gains as $29 Billion Auction Looms

Treasury seven-year notes rose, pushing yields to the lowest level in a week, as the U.S. prepared to sell $29 billion of the securities today.

U.S. 30-year bonds dropped, sending yields to a one-month high, as data showed initial claims for jobless benefits fell last week for the third time this month. Treasuries gained the most in a week yesterday as a Federal Reserve survey showed U.S. economic growth slowed in some areas.

“People want to be in the 5- and 7-year sectors,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “People are not extending to the 30-year because they are nervous being caught out the curve. They are concerned the debt levels are spiraling out of control.”

Yields on the seven-year note fell 5 basis points, or 0.05 percentage point, to 2.34 percent at 12:01 p.m. in New York, according to BGCantor Market Data. They touched 2.33 percent, the lowest level since July 22. Five-year note yields fell 3 basis points to 1.66 percent, while 30-year yields rose 2 basis points to 4.08 percent and touched 4.14 percent, the highest since June 22.

Investors are reaching for yield and there is not enough in two-year Treasuries, so they are “hiding in the belly” of the yield curve of maturities, Comiskey said.

The government’s sale today is the last of three note auctions this week totaling $104 billion and is the smallest seven-year offering since September. The seven-year securities being sold yielded 2.375 percent in pre-auction trading. That compares with 2.575 percent at the previous sale of the debt on June 24.

Demand Level

Investors bid for 3.01 times the amount on offer last month, the highest level since the seven-year note was reintroduced in February 2009, compared with an average of 2.81 for the past 10 auctions.

Five-year securities sold yesterday drew a yield of 1.796 percent, compared with an average forecast of 1.82 percent in a Bloomberg survey of seven primary dealers. Bidding totaled 3.06 times the available debt, the highest level since August 2006.

Initial unemployment claims dropped by 11,000 in the week ended July 24 from a revised 468,000 the previous week, Labor Department figures showed today in Washington. A Bloomberg News survey forecast was for a decline to 460,000. The number of people receiving unemployment insurance rose, while those getting extended payments declined.

Monthly Loss

Benchmark 10-year treasuries were poised for their first monthly loss since March amid gains by stocks and an easing of speculation that Europe’s debt crisis would worsen. Earnings have topped analysts’ estimates at about 78 percent of companies in the Standard & Poor’s 500 Index that have reported second-quarter results so far, according to data compiled by Bloomberg.

The 10-year note yielded 2.97 percent today, 4 basis points higher than the close on June 30 of 2.93 percent. It’s more than 1 percentage point lower than the 4.01 percent high for the year, reached in April, on speculation a cooling of economic expansion will prevent the Fed from raising interest rates.

“We have seen a quite astonishingly positive earnings season, but the excitement in the market has only been limited and the price effect is going to vanish quite quickly,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “It’s hard to see where more positive impetus can come from. We shouldn’t get prepared for tighter Fed policy any time soon and this will be supportive for fixed income. We are in a low yield environment and we’ll remain there.”


U.S. gross domestic product growth slowed to 2.6 percent in the second quarter from 2.7 percent in the previous three months, according to the median estimate of 81 economists in a Bloomberg survey before the report tomorrow.

“For the U.S., the outlook is weakening,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. “The focus is on tomorrow’s gross domestic product numbers and if we see a disappointment, the knee-jerk reaction will be to see a rally in Treasuries.”

Pacific Investment Management Co., which runs the world’s biggest bond fund, is attracting almost $1 billion a week from investors and buying Treasuries with some of the inflows, according to Bill Gross, the co-chief investment officer.

Gross’s $234 billion Total Return Fund, the biggest bond fund, has benefitted this year as yields declined and investors questioned the sustainability of the global recovery.

Yields on 10-year Treasuries are unlikely to revisit the all-time low of 2.04 percent reached Dec. 18, 2008, with the Fed keeping its target rate for overnight loans between banks at a record low range of zero to 0.25 percent for two to three years, Gross said yesterday in a Bloomberg Radio interview with Tom Keene.

“As long as short rates stay at zero or close to zero, and that’s the key caveat, then an investor can make money simply by buying 5-year Treasuries, watching them roll down the curve to four years and then popping back up to five years again,” Gross said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE