Treasuries Drop Before $72 Billion of Sales, Election

Treasury 10-year notes fell for the first time in three days as the U.S. prepared to sell $72 billion of coupon-bearing securities this week, starting with $32 billion of three-year debt today.

Longer maturities led the decline as U.S. voters head to the polls to decide whether President Barack Obama or challenger Mitt Romney will guide the world’s biggest economy for the next four years. Whoever wins will face the job of avoiding the so-called fiscal cliff of $607 billion in spending cuts and tax increases scheduled to take effect in January. A Federal Reserve measure of inflation reached a 14-month high.

“Everything is all about election right now and that has kept the market very, very neutral,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the Fed. “The auction should go well, but outside of that we shouldn’t see much action until the uncertainty of the election is past.”

The benchmark 10-year yield climbed two basis points, or 0.02 percentage point, to 1.70 percent at 11:53 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 fell 1/8, or $1.25 per $1,000 face amount, to 99 10/32.

Neutral Stance

Investors in Treasuries were the most neutral in more than two months as they cut bullish positions ahead of the closely contested U.S. presidential elections, according to a survey by JPMorgan Chase & Co.

Investors raised neutral bets to 70 percent from 68 percent, pushing it to the highest level since Aug. 27, the survey reported.

The Fed-preferred measure of inflation expectations, the five-year, five-year forward break-even rate reached 2.88 percent Nov. 1, the highest since August 2011. The gauge projects the expected pace of consumer price increases during the five-year period beginning 2017.

The 10-year yield will be 1.73 percent at Dec. 31 and rise to 2.03 percent by the end of June, according to a Bloomberg survey of banks and securities companies with the most recent projections given the heaviest weightings.

The previous auction of three-year notes on Oct. 9 drew bids for a record 3.96 times the amount of securities available. The U.S. is scheduled to sell $24 billion of 10-year securities tomorrow and $16 billion of 30-year bonds on Nov. 8.

Tight Race

Obama led Romney 48 percent to 45 percent in an Oct. 31-Nov. 3 national poll conducted by the Pew Research Center, a survey that showed the candidates tied at 47 percent a week ago. The final tracking poll by ABC News and the Washington Post had Obama taking a lead of 50 percent to 47 percent in a survey of 2,345 likely voters conducted Nov. 1-4.

Ten-year Treasury yields will rise to two percent if Romney wins versus a decline to 1.5 percent if Obama wins, according to Barclays Plc, a primary dealer.

Treasuries have returned 15 percent since Obama took office on Jan. 20, 2009, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index handed investors a 91 percent gain including reinvested dividends, according to data compiled by Bloomberg.

“If Obama wins, the initial reaction might still be some modest buying of fixed income, on the view that the Fed will be encouraged to proceed” with its bond-buying program, Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote in an e-mailed note. A Romney victory would result in a “broad sell-off” of fixed income, he said.

Debt Levels

Even as Obama increased the U.S. publicly traded debt to a record $10.8 trillion as of August, investors have been willing to accept lower interest rates as the central bank buys bonds as a way to sustain the expansion and as inflation holds in check.

After purchasing $2.3 trillion of Treasuries and mortgage-related bonds, the Fed on Oct. 24 reiterated its plan to continue unprecedented stimulus measures by buying $40 billion of home-loan securities a month until the labor market improves “substantially.”

The Fed is swapping shorter-term Treasuries in its holdings with those due in six to 30 years as part of its efforts to support the U.S. economy by putting downward pressure on long-term borrowing costs.

The U.S. central bank bought $4.85 billion of Treasuries maturing from November 2018 to August 2020 today, according to the Fed Bank of New York’s website.

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 2.49 percentage points. The average during the past decade is 2.17 percentage points.

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