Treasuries Fall, Push 30-Year Yields to 8-Month High on Outlook

Treasuries dropped, pushing 30-year bond yields to an eight-month high, as initial jobless claims fell and existing-home sales rose more than forecast, bolstering speculation the economic recovery is building steam.

U.S. debt extended losses after a record $13 billion auction of 10-year Treasury Inflation Protected Securities attracted lower-than-average demand.

“It’s the stronger-than-expected data and the TIPS auction,” said Richard Bryant, senior vice president in fixed-income at MF Global Inc. in New York, a broker of exchange-traded futures. “The combination has taken us to the cheaper end of the trading range. There will be increased focus on growth numbers going forward.”

The 30-year bond yield increased eight basis points, or 0.08 percentage point, to 4.61 percent at 5:08 p.m. in New York, according to BGCantor Market Data. It touched 4.63 percent, the highest level since April 29. In 2010, the yield hit a high of 4.86 percent on April 7 and a low of 3.46 percent on Aug. 25. The 4.25 percent security due in November 2040 tumbled 1 5/32 today, or $11.56 per $1,000 face amount, to 94 7/32.

Benchmark 10-year note yields climbed 11 basis points, or 0.11 percentage point, to 3.45 percent and reached 3.47 percent, the highest level since Jan. 5. Two-year note yields rose six basis points to 0.63 percent, a one-week high.

Yield Curve

The difference between yields on 2- and 30-year Treasuries widened to a record, indicating investors are demanding compensation for the risk that inflation will accelerate. The gap touched 4.02 percentage points, the steepest slope to the so-called yield curve since Bloomberg records on the data began in 1977.

The gap between the German 2-year note yield and the yield on the comparable U.S. note widened to as much as 66 basis points today, the most since October, as a report showed producer prices in Europe’s largest economy climbed at the fastest pace in seven months, fueling inflation speculation. The U.S. 2-year note yield has declined this month as investors bet the central bank will not raise rates in the near term.

The U.S. auction of 10-year TIPS drew a yield of 1.17 percent, compared with an average forecast of 1.108 percent in a Bloomberg survey of nine of the Federal Reserve’s 18 primary dealers, who are obligated to bid in U.S. debt auctions. The yield at the last auction of the maturity on Nov. 4 was the lowest ever, 0.409 percent.

Largest Offering

Today’s sale was the largest 10-year TIPS offering since the government began selling inflation-indexed debt in 1997.

The bid-to-cover ratio, which gauges demand by comparing the amount offered with the amount sold, was 2.37, the lowest since April 2009. It was 2.91 at the last sale in November and averaged 2.73 at the past 10 offerings.

“It was a weak auction,” said Alex Li, an interest-rate strategist in New York at primary dealer Deutsche Bank AG. “It may have something to do with the fact that the auction size was a record $13 billion. Inflation is still in the lower end of the range historically, and the TIPS market has already priced in the rise in inflation for 2011.”

Indirect bidders, a category that includes foreign central banks, bought 37.9 percent of the notes, compared with 57.7 percent in November, the most since 2006. The average at the past 10 sales was 44.9 percent.

Applications for unemployment benefits decreased 37,000 in the week ended Jan. 15, the biggest decline since February 2010, to 404,000, Labor Department figures showed today. Economists forecast 420,000 claims, according to the median estimate in a Bloomberg News survey. The number of people on unemployment benefit rolls fell, while those getting extended payments rose.

‘Signs of Healing’

“The labor market has been the thorn in everybody’s side, and it is starting to show signs of healing,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.

Purchases of existing houses, which are tabulated when a contract closes, increased 12 percent last month to a 5.28 million annual rate, the most since May, figures from the National Association of Realtors showed today in Washington. The forecast in a Bloomberg survey was for a 4.1 percent gain.

The U.S. will auction $99 billion in notes next week, the Treasury said today. It will sell $35 billion in two-year notes, $35 billion in five-year debt and $29 billion in seven-year securities, matching the average forecast of nine primary dealers in a Bloomberg survey. Primary dealers are required to bid at the sales.

The sizes of the sales are the same as at the last three monthly offerings of the maturities. The auctions will take place on three days beginning Jan. 25.

The Fed bought $2.2 billion in U.S. debt today maturing from August 2028 through February 2040 as part of its effort to spur economic growth by purchasing as much as $600 billion of U.S. debt through June. It is scheduled to acquire $7 billion to $9 billion tomorrow of Treasuries due from February 2018 to November 2020, according to its website.

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