Treasuries snapped a gain from yesterday as a government report showed U.S. new home sales increased to a two-year high in September, damping demand for the safest securities.
The benchmark 10-year yield rose with the U.S. poised to sell $35 billion of five-year notes today, the second of three note auctions this week totaling $99 billion. Federal Reserve policy makers are forecast to retain plans to buy $40 billion in mortgage-backed securities each month for an indefinite period.
“Because we are getting supply, we are seeing a concession in prices,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut. “All of the data in the last few weeks have been better than expected and that is giving some temporary strength in the economy. But the uncertainty of the election, Europe and the fiscal cliff will continue to keep a lid on rates.”
The 10-year yield rose two basis points, or 0.02 percentage point, to 1.78 percent at 10:38 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 fell 6/32, or $1.88 per $1,000 face amount, to 98 20/32. The yield climbed to 1.83 percent Oct. 18, the highest level since Sept. 18.
The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.50 percentage points. The average during the past decade is 2.17 percentage points.
The five-year notes on offer today yielded 0.78 percent in pre-auction trading, versus 0.647 percent at the previous sale on Sept. 26. Investors bid for 3.06 times the amount of securities available in September, the most since April. The results will be announced at 1 p.m. New York time.
The difference between five- and 30-year yields narrowed to 2.14 percentage points yesterday, the least in six weeks, making it less attractive to opt for the longer maturity. The 10-year average is 1.49 percentage points.
Treasuries advanced yesterday as a decline in shares spurred demand for the relative safety of government debt. The Standard & Poor’s 500 Index slid 1.4 percent to the lowest close since Sept. 5.
The U.S. sold $35 billion sale of two-year notes yesterday and will conclude this week’s supply with a $29 billion seven-year sale tomorrow.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in a twitter message that the Fed may announce a target for economic growth at the end of its policy meeting today, and such a move “would be reflationary.”
The Fed may switch from its “extended period” language and adopt a target for gross domestic product “or something close” today or at its meeting in December, Gross wrote. The Fed statement is scheduled for 2:15 p.m. New York time.
The central bank at its previous meeting on Sept. 12-13 pledged to keep its benchmark interest rate near zero at least through the middle of 2015. Charles Evans, president of the Fed Bank of Chicago, has said policy makers should promise to keep rates low until the unemployment rate falls to 7 percent, as long as inflation does not breach 3 percent.
New home sales climbed 5.7 percent to a 389,000 annual pace, the most since April 2010, following a revised 368,000 rate in August, figures from the Commerce Department showed today in Washington. The median estimate of 75 economists surveyed by Bloomberg called for sales to rise to 385,000.
“The market is reacting to the data, and the data’s been slightly better for the economy,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Fed. “Five-year notes are cheaper by about 10 basis points this month. Most people think the Fed won’t do anything with 13 days until the election.”
The 10-year yield will increase to 2.06 percent by June 30, according to a Bloomberg survey of economists with the most recent forecasts given the heaviest weightings.