U.S. 10-Year Yields Reach 1-Month High Before Auction

Treasuries dropped, pushing 10-year yields to the highest level in a month, as the U.S. prepared to sell $32 billion of three-year debt today, the first of three note and bond auctions this week totaling $72 billion.

U.S. debt fell for a third day before the U.S. sells $24 billion of 10-year notes tomorrow, and $16 billion of 30-year bonds on Aug. 9. Federal Reserve Bank of Boston President Eric Rosengren said the inflationary effects of the central bank’s securities purchase programs are a real concern, in an interview with CNBC. The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, rose to the highest in two months.

“There’s a bit of a risk-on type of tone going on,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed. “It’s weighing on prices. As long as the market continues to back up like this, that would open the doors to more interest. They will look at supply as a buying opportunity.”

The 10-year yield rose six basis points, or 0.06 percentage point, to 1.63 percent at 11:11 a.m. in New York, according to Bloomberg Bond Trader prices, reaching the highest level since July 2. The 1.75 percent note maturing in May 2022 fell 17/32 or $5.31 per $1,000 dollar face amount, to 101 3/32.

The yield on the 30-year bond rose to 2.73 percent, the highest since July 5.

Debt Sale

“A lot of people are sorting through if it’s supply or a re-pricing in general,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “You are moving into a more neutral zone as far as rates are concerned.”

The notes to be sold today yielded 0.36 percent in pre-auction trading, compared with 0.366 percent the previous time they were sold on July 10. Investors submitted orders to buy 3.52 times the amount of available debt last month. The average over for the past 10 sales is 3.49 times.

The difference between yields on 10-year notes and similar-maturity TIPS, a gauge of expectations for consumer prices during the life of the debt, was 2.21 percentage points, touching the highest since May. The average during the past decade is 2.15 percentage points.

Investor appetite for the safety of Treasuries ebbed this month when a U.S. employment report showed the nation added 163,000 jobs, more than the 100,000 projected by economists surveyed by Bloomberg News.

Fed Buys

The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing to cap borrowing costs. It’s now in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs.

The Fed purchased $4.5 billion of Treasuries due from August 2018 to May 2020 today as part of the program, according to the Fed Bank of New York website.

Treasuries investors cut bets the securities will drop in price, resulting in the lowest level of outright shorts in almost six months, according to a survey by JPMorgan Chase & Co.

The percentage of outright shorts dropped to 11 percent from 15 percent in the week ending yesterday, according to the survey, the least since Feb. 13. Neutral bets rose to 72 percent from 68 percent.

The proportion of net longs, or bets the securities will rise versus those that will fall, increased to 6 percentage points from 2 percentage points, as the number of outright longs was unchanged at 17 percent.

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