Treasuries Decline Before $13 Billion Sale of 30-Year Notes, CPI

Treasury 30-year notes declined as the U.S. prepared to auction $13 billion of the securities today following sales of three- and 10-year debt earlier this week.

Losses in U.S. government securities were limited before data forecast to show U.S. consumer prices fell, providing the Federal Reserve room to take further steps to spur the economy. The gap in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for inflation over the life of the debt, was 2.1 percentage points, down from 2012 high of 2.45 percentage points in March.

“Investors may be taking a little breather from buying Treasuries,” said Masaru Hamasaki, chief strategist in Tokyo at Toyota Asset Management Co., which oversees the equivalent of $24 billion. “The flight-to-quality amid concern over the European debt crisis and U.S. slowdown has already sent bond prices to an expensive level.”

The 30-year yield rose two basis points, or 0.02 percentage point, to 2.73 percent at 6:33 a.m. in London, according to Bloomberg Bond Trader prices. The 3 percent bond due May 2042 fell 3/8, or $3.75 per $1,000 face amount, to 105 18/32. Benchmark 10-year yields gained two basis points to 1.61 percent after dropping to a record 1.4387 percent on June 1.

Japan’s 10-year rate added one basis point to 0.865 percent.

The 30-year Treasuries on offer today yielded 2.735 percent in pre-auction trading, compared with 3.09 percent at the previous offering on May 10. Investors bid for 2.73 times the amount for sale last month, versus an average of 2.67 for the previous 10 auctions.

Treasury Auctions

At a $21 billion auction of 10-year securities yesterday, the so-called bid-to-cover ratio was 3.06, versus 2.9 percent at the May offering and an average of 3.08 at the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 42 percent of the securities at the offering, the most since December. That compared with an average of 41.5 percent for the past 10 sales of 10-year notes.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 20.8 percent, compared with an average of 14.7 percent at the past 10 sales. Their share yesterday was the highest since August.

U.S. government securities gained 3.2 percent this quarter through yesterday, Bank of America Merrill Lynch data showed. The MSCI All Country World Index of equities handed investors an 8.8 percent loss including reinvested dividends over the same period, as concern that the European debt crisis is spreading to the region’s larger economies from Greece prompted investors to seek safer assets.

Debt Crisis

Greeks will vote again this weekend after a May election failed to produce a coalition government. Moody’s Investors Service cut Spain’s credit rating by three steps to Baa3 yesterday, citing the nation’s increased debt burden, weakening economy and limited access to capital markets.

“The relentless purchasing of Treasuries astounds me,” said Paul Montaquila, head of fixed-income trading at Bank of The West in San Ramon, California. “The uncertainty in Europe is an ever-lingering backdrop.”

The U.S. consumer-price index probably fell 0.2 percent in May, after no change in April according to the median estimate of economists in a Bloomberg News survey before the Labor Department releases the figures today. That would be the biggest decline since December 2008.

Retail Sales

A report yesterday showed retail sales in the world’s largest economy decreased for a second month in May. The smallest wage gains in a year and unemployment exceeding 8 percent are taking a toll on the consumer spending that accounts for about 70 percent of the economy, leaving it more vulnerable to shocks from the European crisis.

“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Fed Chairman Ben S. Bernanke told lawmakers on June 7. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”

The Fed, which meets June 19-20, bought $2.3 trillion of bonds in two rounds of so-called quantitative easing, or QE, from December 2008 to June 2011, seeking to cap borrowing costs and stimulate the economy.

The central bank plans to buy as much as $2.25 billion of Treasuries due from February 2036 to May 2042 today under its program known as Operation Twist, which aims to replace holdings of shorter-term securities with longer-term bonds, according to the Fed Bank of New York’s website.

Cooling Inflation

“Falling inflation coupled with the weaker retail sales data, at the margin, may bolster the argument for a change in monetary policy toward further quantitative easing at the upcoming” Federal Open Market Committee meeting, Ellen Zentner, a senior economist at Nomura Holdings Inc. in New York, wrote in a note to clients yesterday.

A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, which gauges the average inflation rate between 2017 and 2022, was 2.52 percent on June 11, down from a 2012 high of 2.78 percent on March 19 and a five-year average of 2.8 percent.

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