Treasury 10-year notes fell for the first time in three days before a $32 billion auction of three-year debt as Moody’s Investors Service said it may lower the U.S. credit rating unless lawmakers agree to reduce debt.
Thirty-year yields climbed toward the highest level in three weeks as a gauge of inflation expectations approached the most since March. Data last week showed U.S. job growth slowed, boosting speculation the Federal Reserve will increase asset purchases, or quantitative easing, to encourage growth. Fed policy makers meet this week.
“This has everything to do with QE and what the Fed says on Thursday,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the central bank. “There’s a 50-50 chance they do it. We’re going to be in a tight range till then. There’s a lot of supply. The three-year will come on the screws.”
The benchmark 10-year yield rose four basis points, or 0.04 percentage point, to 1.7 percent at 11:36 a.m. in New York, according to Bloomberg Bond Trader prices. The price of the 1.625 percent note due in August 2022 fell 3/8, or $3.75 per $1,000 face amount, to 99 11/32.
The 30-year yield climbed five basis points to 2.85 percent after increasing to 2.86 percent on Sept. 7, the highest level since Aug. 22.
Moody’s said in a statement it may lower the U.S. credit rating to Aa1 from Aaa unless budget negotiations during 2013 lead to a reduction of the percentage of debt to gross domestic product. Standard & Poor’s downgraded the U.S. on Aug. 5, 2011, and has said political and fiscal risks may lead to another cut. Fitch Ratings rated the nation at AAA with a negative outlook.
“We’re a long way from them doing it, so I don’t think it has much of an impact right now,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Everybody knows that if we don’t get our house in order,” the nation will face trouble, he said.
The difference in yield between 10-year notes and similar-maturity inflation-linked debt, a gauge of traders’ expectations for consumer prices known as the break-even rate, was 2.39 percentage points. The spread widened to as much 2.4 percentage points yesterday, the most since March 22. It has averaged 2.2 percent this year.
The spread between 10- and 30-year yields, called the yield curve, reached 1.18 percentage points yesterday, the most since May, before closing at 1.15 basis points. It was little changed today. Thirty-year bonds are more sensitive to inflation than shorter-dated Treasuries.
A yield curve is a graph that charts the rates of bonds of a similar type with different maturities. It steepens when yields on shorter-dated debt fall, those on longer-dated bonds rise, or when both occur at the same time.
Three-year notes yielded 0.335 percent in pre-auction trading, compared with 0.37 percent at the previous 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, a gauge of demand, versus 3.52 times in July. The average bid-to-cover ratio at the past 10 auctions was 3.51.
Indirect bidders, the investor class that includes foreign central banks, purchased 29.7 percent of the notes at the August three-year auction, compared with 30 percent in July. The average at the past 10 offerings was 34.1 percent.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.4 percent of the notes, the lowest since April. The figure compares with an average of 9.9 percent for the past 10 auctions.
Treasury three-year notes have returned 0.5 percent this year, according to Bank of America Merrill Lynch indexes. Ten-year notes have gained 3.8 percent and 30-year bonds have advanced 3.4 percent, the data show.
The government is scheduled to sell $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds Sept. 13.
“Demand tomorrow should be fairly good,” said Justin Lederer, an interest rate strategist at the primary dealer Cantor Fitzgerald LP in New York. “The bond is always the questionable auction. Overall demand will be decent.”
Fed policy makers open a two-day meeting tomorrow to look for ways to spur growth. The central bank has already purchased $2.3 trillion of Treasury and mortgage-related debt in two rounds of quantitative easing to spur the economy.
Employers added 96,000 positions in August, versus a Bloomberg News survey’s forecast of 130,000 jobs, the Labor Department reported Sept. 7. The unemployment rate remained above 8 percent for a 43rd month.
The Fed also is swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs. It purchased $1.8 billion of securities today maturing from February 2036 to August 2042 as part of the program, according to the website of the Fed Bank of New York.
Four primary 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, 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.