Treasuries Fall Before 10-Year Sale; Yield Reaches 5-Month High

Treasuries fell, pushing 10-year yields to the highest level in five months, on speculation demand will wane at an auction of the securities today because the U.S. may need to sell more debt to fund tax cut extensions.

Ten-year notes extended yesterday’s biggest tumble in 18 months after President Barack Obama on Dec. 6 agreed to prolong tax cuts for two years and an auction of three-year debt drew the least demand since February. Thirty-year yields rose to a six-month high before reports this week that economists said will show consumer confidence increased and fewer Americans filed claims for unemployment benefits.

“The auctions are a little bit disappointing, and that reflects the fact that investors want more of a premium attached to Treasuries,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s largest interdealer broker. “We might see a little bit of selling action.”

The yield on the benchmark 10-year note rose 10 basis points to 3.23 percent as of 6:48 a.m. in London, after reaching 3.25 percent, the highest since June 22, according to data compiled by Bloomberg. The 2.625 percent security due November 2020 fell 26/32, or $8.13 per $1,000 face amount, to 94 29/32. The yield jumped 21 basis points yesterday.

The 30-year yield climbed four basis points to 4.41 percent after touching 4.44 percent, the most since May 14. The 10-year yield is likely to increase to 3.25 percent “in another week or so,” Carr said.

Ten-Year Auction

The $21 billion of 10-year notes to be sold today yielded 3.24 percent in pre-auction trading, compared with 2.636 percent at the prior sale on Nov. 9. Investors bid for 2.80 times the amount offered last month, compared with 2.99 times on Oct. 13.

At yesterday’s three-year note auction, the securities drew a yield of 0.862 percent, compared with the average forecast of 0.841 percent in a Bloomberg News survey of primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.91, the lowest level since February.

The U.S. will auction $13 billion of 30-year debt tomorrow, completing this week’s $66 billion of note and bond sales.

Losses in Treasuries were tempered on speculation Ireland’s debt crisis will spread, underpinning demand for safer assets.

Ireland is under pressure to pass legislation to receive an 85 billion-euro ($112.4 billion) bailout. Lawmakers yesterday passed an initial series of votes on a 6 billion-euro budget in parliament in Dublin. The government faces at least three more votes, including a separate ballot on cuts in welfare payments before the budget is approved.

‘Much Worse’

“The situation in Europe looks much worse than in the U.S., given that problems in Ireland, Greece and Portugal are likely to recur,” said Yuuki Sakurai, who helps oversee the equivalent of $8.7 billion as chief executive officer at Fukoku Capital Management Inc. in Tokyo. “From the viewpoint of investing overseas, U.S. government debt is attractive.”

International Monetary Fund Managing Director Dominique Strauss-Kahn said yesterday the European Union needs to find a “comprehensive” solution to its debt crisis and not rely on a “case-by-case” method.

U.S. government debt has handed investors a 6.2 percent return so far this year, according to Bank of America Merrill Lynch indexes.

Obama’s Deal

In Obama’s deal with the Republicans, he agreed on the two-year extension of current tax rates in exchange for another 13 months of federal unemployment insurance for the long-term jobless and cutting the payroll tax by $120 billion for one year.

The President said he would accept a lower rate for the estate tax than Democrats wanted in order to break a stalemate over extending George W. Bush’s tax cuts before Congress adjourns.

“Treasuries are sharply weaker after President Obama extended the Bush tax cuts,” analysts including Josephine Heffernan, Sydney-based senior economist at St. George Bank Ltd., wrote in a research note today. “The extension will see a further widening in the government deficit and increase the supply of bonds.”

Jobless claims declined by 11,000 to 425,000 in the week ended Dec. 4, according to a Bloomberg survey before the Labor Department report tomorrow. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 72.5 in December from 71.6 the prior month, a separate Bloomberg survey showed before the figures are released on Dec. 10.

The extra yield investors demand to hold 10-year notes over 2-year debt increased to as much as 2.68 percentage points today, the most since May 18.

The difference between yields on 10-year notes and those on Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, widened to as much as 2.28 percentage points today, matching yesterday which was the most since May 14.

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