Treasuries Snap Eight-Day Rally as Spain Announces Budget

Treasuries declined, snapping their longest rally in almost four years, as risk appetite increased with Spain’s cabinet approving a budget it said would ease the nation’s debt crisis.

Bonds pared losses earlier as reports showed U.S. household spending slowed. Yields on U.S. longer-term securities rose as speculation the Chinese government will do more to support its economy damped demand for the safest assets. The U.S. will auction $29 billion of seven-year debt today, the last of three note sales this week totaling $99 billion.

“There’s been some positive news out of Europe,” said Dan Mulholland, head of U.S. Treasury trading in the capital-markets unit of BNY Mellon Corp. in New York. “They are likely not out of the woods. The auction should go fine in light of the uncertainty surrounding Europe.”

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.63 percent at 11:55 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 declined 7/32, or $2.19 per $1,000 face amount, to 99 29/32. Yields fell to 1.61 percent yesterday, the lowest since Sept. 7.

Thirty-year bond yields increased three basis points to 2.81 percent after falling yesterday to 2.78 percent, also the lowest level since Sept. 7.

Treasury Auction

The seven-year notes being sold today yielded 1.05 percent in pre-auction trading, compared with 1.081 percent at the previous sale of the debt on Aug. 30. Investors bid for 2.80 times the amount offered last month, up from 2.64 times in July.

The U.S. sold $35 billion in five year notes yesterday at a yield of 0.647 percent, and auctioned an equal amount in two-year notes the previous day at a yield of 0.273 percent.

“We’ll see decent demand,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed income assets. “We have a bit of a concession built in right now.”

Treasuries gained for an eighth day yesterday, the longest stretch since December 2008, as investors seeking a refuge from Europe’s sovereign-debt crisis bolstered demand for the safest securities. Protesters in Spain and Greece criticizing budget cuts clashed with police this week.

Spain’s 2013 budget is designed to end the nation’s debt crisis, Deputy Prime Minister Soraya Saenz said.

Spanish bonds advanced today even after demonstrators called on Prime Minister Mariano Rajoy to reverse austerity measures. The yield on Spain’s 10-year note dropped 12 basis points to 5.95 percent, according to Bloomberg data.

U.S. Reports

U.S. stocks gained, with the Standard & Poor’s 500 Index rising 0.5 percent in its first advance in six days.

Treasuries trimmed losses after the Commerce Department said U.S. household purchases, which account for about 70 percent of the economy, grew 1.5 percent in the second quarter, versus a previously reported 1.7 percent. An index of pending home resales unexpectedly fell 2.6 percent after a revised 2.6 percent gain in July, figures from the National Association of Realtors showed today in Washington. A Bloomberg News survey forecast a 0.3 percent gain.

“It’s just a little bit of unwinding of the fears yesterday,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 21 primary dealers that trade with the Fed. “The worry was that there wouldn’t be a bailout for Spain and the unrest would force the government to not make austerity.”

Risky Tactic

Federal Reserve Bank of Philadelphia President Charles Plosser said “the economy is not doing well.” Plosser said in an interview today on Bloomberg Television with Tom Keene that tying policy to a specific unemployment rate is risky. The U.S. jobless rate has been more than 8 percent since February 2009.

The central bank announced on Sept. 13 plans to buy $40 billion of mortgage securities a month in a third round of its quantitative-easing stimulus strategy.

A measure of relative yields on mortgage securities that guide U.S. home-loan rates was near a record low amid bets the Fed will find a shortage of the bonds as it expands purchases. A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value was 59 basis points higher than an average of five- and 10-year Treasury rates. The record, 55 basis points, was reached Sept. 25.

Less Expensive

Treasuries dropped from the most expensive level in two months. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was at negative 0.93 percent. It reached negative 0.97 percent yesterday, the most costly since July 25. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The 2012 average is negative 0.74 percent.

Treasuries have returned 0.7 percent since the end of June, according to Bank of America Merrill Lynch indexes. U.K. gilts handed investors a 1.5 percent gain in the period, and German bunds rose 1.2 percent.

The gap in yield between 10-year notes and similar-maturity Treasury Inflation Protected Securities, known as the break-even rate, was at 2.45 percentage points after touching 2.73 percentage points on Sept. 17, the most since May 2006. It has averaged 2.22 percentage points this year.

The five-year, five -year forward break-even rate, a measure of the inflation outlook the Fed uses to help guide monetary policy, was 2.7 percent on Sept. 24, down from a 13-month high of 2.88 percent on Sept. 14. The 10-year average is 2.75 percent.

Fed Sale

The Fed is swapping shorter-term Treasuries in its holdings with those due in six to 30 years to support the economy by putting downward pressure on borrowing costs. The central bank sold $7.8 billion today of debt maturing from September 2015 to November 2015 as part of the program, according to the Fed Bank of New York’s website.

Treasury yields rose earlier as the Shanghai Securities News said there was speculation the China Securities Regulatory Commission will announce 10 market-boosting measures at a press conference today.

China’s central bank added a net 365 billion yuan ($57.9 billion) to the financial system this week, the most according to data compiled by Bloomberg starting in 2008.

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