Treasuries dropped for a second day as the U.S. prepared to sell $21 billion of 10-year notes today and $13 billion of so-called long bonds tomorrow.
Thirty-year yields approached the highest level this month as Barclays Plc Chief Executive Officer Robert Diamond said the euro will survive, reducing demand for the safest securities. The longest maturities led declines as Denmark’s decision to ease liability rules for pension funds reduced demand for longer-dated bonds. The decline in Treasuries was tempered before a government report that economists said will show U.S. retail sales fell in May.
“The upcoming supply is one of the factors” behind the drop in Treasuries, said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “It’s been a crowded trade for some time.”
The 30-year yield climbed three basis points, or 0.03 percentage point, to 2.80 percent at 7:36 a.m. New York time, according to Bloomberg Bond Trader prices. The 3 percent bond due in May 2042 fell 17/32, or $5.31 per $1,000 face amount, to 104 3/32. The yield rose to 2.85 percent on June 11, the highest level since May 29.
Benchmark 10-year yields increased two basis points to 1.68 percent after dropping to a record 1.4387 percent on June 1.
The 10-year notes to be sold today yielded 1.69 percent in pre-auction trading, compared with 1.855 percent at the previous offering on May 9. Investors submitted bids for 2.9 times the amount on offer at that auction, versus 3.08 times on April 11.
Yesterday’s $32 billion auction of three-year notes drew a yield of 0.387 percent, compared with a forecast of 0.383 percent in a Bloomberg News survey of primary dealers, companies obliged to bid at U.S. debt sales. The bid-to-cover ratio fell to 3.53 from 3.65 at the previous sale on May 8.
“Traders might have found that bonds have become too expensive as they get new supply,” said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees about $70 billion in Tokyo.
Denmark’s government will allow pension funds and life insurers to raise the discount rate they use to calculate their liabilities. When Sweden’s regulator pushed through a similar change in pension rules on June 7, Swedish 10-year yields surged 30 basis points because the change reduced the industry’s incentive to keep purchasing longer-maturity debt to balance their liabilities.
Speculation the 17-nation euro bloc will contain its debt crisis also damped demand for the safest assets.
“The underpinnings of the single currency, the underpinnings of the integrated economy across Europe are very, very strong,” Diamond said in a Bloomberg Television interview in Hong Kong. The euro area is more likely to “muddle through” than break up, said Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch Ratings in Hong Kong.
U.S. government securities have returned 1.6 percent this year, according to Bank of America Merrill Lynch indexes. They have fallen 0.5 percent in June.
U.S. retail sales dropped 0.2 percent in May, the first decline in a year, according to the median estimate of economists in a Bloomberg survey before the report today.
The central bank will purchase as much as $5.5 billion of Treasuries due from August 2020 to May 2022 today under its program known as Operation Twist, as it seeks to replace holdings of shorter-term securities with longer-term bonds, according to the Fed Bank of New York’s website.
The Fed, which meets June 19-20, bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from December 2008 to June 2011, seeking to cap borrowing costs and stimulate the economy.
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents expectations for inflation over the life of the securities, was little changed today at 2.14 percentage points, down from this year’s high of 2.45 percentage points in March. The average over the past 10 years is 2.15 percentage points.