Treasuries fell, with 10-year note yields rising to a one-month high, as better-than-forecast economic data and optimism that the political will exists to stave off a deeper crisis in Europe trimmed refuge demand.
Benchmark 10-year yields had their biggest two-day gain in seven months this week as Spain kept its investment-grade debt rating from Moody’s Investors Service and U.S. new-home construction rose to the highest level in four years. The U.S. will auction $99 billion of notes next week. The Federal Reserve is forecast to maintain its bond-buying stimulus plan at its policy meeting Oct. 24.
“The data in the U.S. seems to be getting progressively stronger and European risk seems to be waning some,” Christopher Sullivan, who oversees $2 billion as chief investment officer at United Nations Federal Credit Union in New York, said in a phone interview yesterday. “With auctions next week, there may be more resistance to the lower yields we’ve seen.”
The benchmark 10-year yield climbed 11 basis points, or 0.11 percentage point, to 1.76 percent in New York, according to Bloomberg Bond Trader prices. The yield, which surpassed the 200-day moving average of 1.808 percent, touched the highest level since Sept. 19.
The yield on the 30-year bond reached 3.02 percent, the highest level since Sept. 19, as it gained 10 basis points. It traded above its 2.93 percent 200-day moving average.
Treasuries are close to the least expensive in almost 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 negative 0.81 percent yesterday, near the least costly level since Aug. 21. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for the past 10 years is 0.44 percent. The all-time low was negative 1.02 percent on July 24.
The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, widened to 2.50 percentage points. It touched 2.73 on Sept. 17, the highest since 2006. The average over the past decade is 2.17 percentage points.
The U.S. sold $7 billion in 30-year TIPS on Oct. 18 at a record low yield of 0.479 percent.
The Treasury will auction $35 billion of nominal two-year notes on Oct. 23, the same amount of five-year debt the next day and $29 billion of seven-year securities on Oct. 25.
Yields rose after Moody’s kept Spain’s rating at investment grade on Oct. 16, citing a reduction in the risk of the country losing market access because of the European Central Bank’s willingness to buy its debt. Moody’s assigned a negative outlook on Spain’s Baa3 sovereign debt, one step above junk, the New York-based company said in a statement.
U.S. government debt fell amid a report Germany is open to Spain seeking a precautionary credit line from Europe’s rescue fund, two senior coalition lawmakers said, signaling a reversal of Finance Minister Wolfgang Schaeuble’s public position.
The comments by Michael Meister, a deputy caucus leader of Chancellor Angela Merkel’s Christian Democratic bloc, and Norbert Barthle, her party’s budget spokesman, indicate a rolling back of German resistance to a full sovereign bailout for Spain. Schaeuble cautioned Spain against seeking aid on top of its bank bailout as recently as last month.
“It shows that Germany is more open to reaching into their own pockets to help out the peripheral countries in Europe,” Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors, said Oct. 16. “We have to see what the details are - - it’s difficult for Europe to come out of this crisis without Germany using some of their own money to correct it.”
Treasuries pared losses yesterday as Spanish Prime Minister Mariano Rajoy said after a European Union meeting in Brussels that his nation doesn’t feel under any pressure to ask for a bailout.
U.S. housing starts jumped 15 percent to an 872,000 annual rate last month, the most since July 2008 and exceeding all forecasts in a Bloomberg survey of economists, Commerce Department figures showed in Washington. The median estimate of 81 economists surveyed by Bloomberg called for 770,000. An increase in building permits may mean the gains will be sustained.
“If housing is recovering, it’s obviously positive for risk in general, and you see the Treasury market cheapening up,” said Scott Sherman, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that trade directly with the Fed.
U.S. government securities also fell this week as reports showed gains in retail sales and industrial production.
Retail sales in the U.S. rose 1.1 percent last month after a revised 1.2 percent increase in August that was the biggest since October 2010 and larger than previously reported, Commerce Department figures showed Oct. 15 in Washington. The median forecast of 77 economists surveyed by Bloomberg called for a 0.8 percent rise.
Another report showed output at factories, mines and utilities increased 0.4 percent to top forecasts, after a 1.4 percent drop in August that was the biggest since March 2009. Other reports showed there was little inflation outside of fuel costs and homebuilder confidence climbed to a six-year high.
“There’s a little bit more optimism.” Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors, said on Oct. 17. “There’s a settling of risk in Europe at this point -- not that it’s behind us, but it’s weighing on Treasuries. The meetings in Europe will dominate our trading outlook.”
Hedge-fund managers and other large speculators reversed to a net-long position in 30-year bond futures in the week ending Oct. 16 from a net-short position, according to U.S. Commodity Futures Trading Commission data.
Speculative long positions, or bets prices will rise, outnumbered short positions by 3,219 contracts on the Chicago Board of Trade. Last week, traders were net-short 828 contracts.
The 10-year yield is poised to fall to 1.75 percent, and possibly as low as 1.60 percent, after it was unable to make a strong break of its 200-day moving average of 1.81 percent, and failed to break through 1.83 percent, MacNeil Curry, chief rates and currencies technical strategist in New York at the firm’s Bank of America said. Ten-year notes’ intraday momentum oscillators are signaling “oversold” levels, Curry added.
“We’ve come up against the highs of the trading range and the momentum has reversed,” Curry, said in a telephone interview. “We closed above the 200-day moving average at 1.81, but we haven’t been able to extend through it.”