Treasuries fell, snapping a gain from yesterday, on concern benchmark yields that have dropped more than half a percentage point in the past three months will damp demand as the U.S. sells $99 billion of notes this week.
The $35 billion two-year auction today faces an extra hurdle from the Federal Reserve, which is selling short-term debt from its holdings to buy longer maturities. The Fed announced last week that it plans to extend the program, known as Operation Twist, through year-end to spur the economy. JPMorgan Chase & Co., the biggest U.S. bank, favors investment-grade corporate bonds.
“The market is mindful of the supply and what the Fed will do with Operation Twist,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There’s a lot of supply coming through and that remains a hindrance and is weighing on the market. The Treasury isn’t going to slow down on its funding needs.”
The 10-year yield climbed four basis points, or 0.04 percentage point, to 1.64 percent at 7:01 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 fell 10/32, or $3.13 per $1,000 face amount, to 101. The yield, which declined seven basis points yesterday, has dropped 55 basis points in the past three months.
Two-year yields were little changed at 0.30 percent, versus the record low of 0.1431 percent set in September.
The government plans to auction $35 billion of five-year notes tomorrow and $29 billion of seven-year debt on June 28.
Investor appetite for the safest securities helped increase bidding at the previous two-year auction on May 22. Money managers submitted orders to buy 3.95 times the amount of available debt, the most since November at the monthly auctions.
“Yields will rise,” said Kei Katayama, who buys U.S. government debt in Tokyo at Daiwa SB Investments Ltd., which manages the equivalent of $62.2 billion. “The two-year auction may have difficulties because of Operation Twist. The U.S. economy is not very strong, but I expect steady growth.”
Katayama said he is favoring shorter maturities, those that will fall the least in price if yields rise, even after long-term bonds beat the rest of the market this year.
U.S. 10-year yields will increase to 2.15 percent by year-end and 2.52 percent by the middle of 2013, according to Bloomberg News survey of economists.
Treasuries rallied yesterday as investors sought a refuge on speculation European leaders will fail to stem the euro bloc’s debt crisis at a two-day summit starting June 28. Moody’s Investors Service cut the credit ratings of 28 Spanish banks yesterday including Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA.
Treasuries have returned 1.9 percent this year as of yesterday, according to Bank of America Merrill Lynch indexes, as Europe’s debt crisis boosted safety demand. Thirty-year bonds surged 5.8 percent.
The MSCI All-Country World Index of stocks gained 1.9 percent with dividends reinvested, while the Standard & Poor’s GSCI Total Return Index of metals, fuels and agricultural products fell 12 percent. U.S. corporate bonds returned 5 percent, the Bank of America figures show.
Corporate bonds are a haven as growth slows, Jan Loeys, the chief market strategist at JPMorgan Chase, said yesterday.
“High-grade credit overall is the best place to be,” he said on Bloomberg Television’s “Lunch Money” with Stephanie Ruhle and Adam Johnson. “Get out of equities.”
Today’s decline in Treasuries was tempered before a U.S. report that economists said will show consumer confidence fell to a five-month low, underpinning demand for the safest assets.
The Conference Board’s index dropped to 63 in June from 64.9 in May, according to the median forecast in a Bloomberg News survey. That would be the lowest outcome since January.
Fed officials led by Chairman Ben S. Bernanke last week extended Operation Twist by $267 billion through the end of 2012. The central bank plans to buy as much as $5.5 billion of Treasuries due from August 2020 to May 2022 today, according to the Fed Bank of New York’s website.
The Fed also repeated its pledge to keep its target for overnight bank lending at almost zero through at least late 2014. The two-year yield, which tends to track the Fed’s benchmark because of its shorter maturity, has held to a range of 0.2 percent to 0.41 percent this year.
Policy makers lowered their estimate for 2012 growth to a range of 1.9 percent to 2.4 percent, from 2.4 percent to 2.9 percent in April.
“We’d like to buy more bonds” in the U.S., said Hideo Shimomura, who helps oversee the equivalent of $75.2 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co. “The economic situation is getting worse.”
The two-year yield may extend gains if it holds above its 100-day moving average, currently at 0.292 percent, according to data compiled by Bloomberg.
A break above that level may see the yield climb first toward 0.3105 percent, the high from June 20 and 21, and then to the March 27 low at 0.3152 percent, the data show.