Treasuries halted a gain from yesterday as investors prepared to bid at a $32 billion 3-year auction today, which will be followed by sales of 10-year notes tomorrow and 30-year bonds the day after.
The difference between yields on 10-year notes and same-maturity inflation-linked securities, a gauge of trader expectations for consumer prices over the life of the debt, rose to a five-month high of 2.40 percentage points yesterday. The gauge is climbing after data last week showed slower job growth, boosting speculation the Federal Reserve will increase asset purchases to spur the economy and inflation.
Ten-year yields were little changed at 1.65 percent as of 7:08 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 was 99 26/32. The rate compares with the average of 3.72 percent for the past decade.
“Yields are unattractive,” said Kei Katayama, who buys U.S. government debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $63.1 billion. “There is gradual, slow growth in the economy.” Daiwa SB is betting Treasury rates will increase as the economy improves, he said.
Japan’s 10-year rate was little changed at 0.795 percent.
Treasuries advanced yesterday on signs of slowing economic growth in China and Japan.
U.S. payrolls rose by 96,000 in August, the Labor Department said Sept. 7, less than the 130,000 median estimate of economists in a Bloomberg News survey.
The spread between 10- and 30-year yields reached 1.18 percentage points yesterday, the most since May. Thirty-year bonds, because of their longer maturity, are more sensitive to inflation than shorter-dated Treasuries.
Long-term yields will be higher than short-term rates in the U.S. and Europe because of reflation, according to Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co.
Bond yield curves will be “very steep” for “a very long time,” Gross wrote in a Twitter post yesterday.
Three-year notes yielded 0.335 percent in pre-auction trading, versus 0.37 percent at the last sale of the securities on Aug. 7. The record low auction yield was 0.334 percent in September 2011.
Investors submitted orders to buy 3.51 times the amount of available debt last month, matching the average for the past 10 sales.
Indirect bidders, the investor class that includes foreign central banks, purchased 29.7 percent of the notes, compared with an average of 34.1 percent for the past 10 sales.
The government is also scheduled to sell $21 billion of 10-year notes tomorrow and $13 billion of 30-year debt Sept. 13.
Treasury three-year notes have returned 0.5 percent this year, according to Bank of America Merrill Lynch indexes. Ten-year notes gained 3.8 percent and 30-year bonds advanced 3.4 percent, based on the data.
Investors looking for higher yields than those on government securities should consider U.S. bank debt, Bank of America strategists Ralph Axel in New York and Bin Gao and Adarsh Sinha in Hong Kong wrote in a report yesterday.
The bonds yield 2.10 percentage points more than Treasuries, with demand for the debt narrowing the spread from 3.84 percentage points at the end of last year, based a Bank of America index of the securities. U.S. bank debt returned 12 percent this year.
Fed policy makers meet tomorrow and the next day to look for ways to spur growth.
The U.S. trade deficit probably widened in July as a slowing global economy limited demand for exports, economists said before a report today. The gap grew to $44 billion from $42.9 billion in June, according to the median forecast of 74 economists surveyed by Bloomberg.
The central bank has already purchased $2.3 trillion of Treasury and mortgage-related debt to cap interest rates under a policy known as quantitative easing, or QE. 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 bank is scheduled to buy as much as $2 billion of securities maturing from February 2036 to August 2042 today as part of the program, according to the website of the Fed Bank of New York.
Four government bond dealers predict Chairman Ben S. Bernanke will drop his policy of limited bond purchases and opt for open-ended buying to cap borrowing costs. Economists at Goldman Sachs Group Inc., Barclays Plc, BNP Paribas SA and Deutsche Bank AG say the Fed will tie purchases to economic performance, not a sum and end-date.
“We’ll get a rally out of that,” said Marc Fovinci, the head of fixed income in Portland, Oregon at Ferguson Wellman Capital Management Inc., which has $3.1 billion in assets.
Inflation isn’t a danger yet, he said. “That risk is there, but it’s at least many months, if not years, down the road,” Fovinci said.