Yields on Treasury 30-year bonds increased from almost a four-week low before the U.S. sells $16 billion of the securities amid speculation the Federal Reserve’s efforts to stimulate the economy may lead to inflation.
Long-bond yields fell yesterday the most in 11 weeks as President Barack Obama’s re-election fueled speculation the Fed will keep buying bonds and as the approach of the so-called fiscal cliff of U.S. spending cuts and tax increases spurred demand for safety. Two note auctions earlier this week drew lower demand than previous sales.
“Treasuries had a big run yesterday,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “The longer end is weaker, but we do have 30-year bonds to sell.”
The 30-year bond yield was little changed at 2.83 percent at 11:06 a.m. in New York, according to Bloomberg Bond Trader prices. It fell earlier to 2.81 percent after reaching 2.80 percent yesterday, the lowest level since Oct. 12. Its nine basis-point drop yesterday was the biggest daily loss since Aug. 22. The price of the 2.75 percent security due in August 2042 lost 3/32, or 94 cents per $1,000 face amount, to 98 11/32.
Ten-year note yields slipped one basis point, or 0.01 percentage point, to 1.67 percent. They fell 10 basis points yesterday to 1.65 percent.
U.S. government securities traded at the most expensive levels in more than three weeks. The 10-year term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, was negative 0.89 percent, the most costly since Oct. 15. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.76 percent.
The fiscal cliff comprises $600 billion of tax increases and spending cuts scheduled to take effect automatically next year unless Congress acts.
The Fed purchased $2.3 trillion of Treasuries and mortgage-related bonds in two rounds of quantitative-easing stimulus from 2008 to 2011 and has begun a third effort. The central bank announced Sept. 13 it would buy $40 billion a month of mortgage-backed securities until the outlook for the labor market improves “substantially.”
The central bank is also swapping shorter-maturity Treasuries in its holdings with those due in six to 30 years as part of its efforts to put downward pressure on long-term borrowing costs.
The central bank bought $4.89 billion of Treasuries today due from November 2020 to August 2022 today as part of the program, according to the Fed Bank of New York.
The bonds scheduled for sale today yielded 2.845 percent in pre-auction trading, down from 2.904 percent at last month’s sale. That compares with a record-low auction yield of 2.58 percent on July 12.
At the previous 30-year auction on Oct. 11, the bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount sold, was 2.49, versus 2.68 times in September.
Today’s 30-year auction should go well, as “investors still need duration and yield and look for rates to stay low with Obama winning a second term,” Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, which as one of the Fed’s 21 primary dealers is obliged to bid in U.S. debt auctions, wrote in a note to clients. “We expect decent demand for the long end.”
Indirect bidders, a class of investors that includes foreign central banks, bought 26.5 percent of the bonds at the October sale, the smallest share since August 2011, versus 38.7 percent at the September auction. The average for the past 10 offerings is 32.6 percent.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 14.2 percent of the securities at last month’s sale, less than the average 14.4 percent at the past 10 auctions.
Thirty-year bonds have returned 4.3 percent, this year, compared with a 2.4 percent gain in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes.
Today’s long-bond sale takes place after demand fell at both a $24 billion 10-year auction yesterday and a $32 billion three-year offering on Nov. 6. Investors bid for 2.59 times the amount of securities available yesterday, versus 3.26 times at the previous 10-year auction in October. For the three-year sale, the figure dropped to 3.41, from 3.96 a month earlier.
Thirty-year bonds will yield 2.89 percent at year-end and 3.13 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. Ten-year notes will yield 1.73 percent by Dec. 31 and 2.03 percent by June 30, the forecasts say.
Fewer Americans than forecast filed claims for unemployment insurance last week as the effects of Hurricane Sandy started to show up. Applications for jobless benefits fell by 8,000 to 355,000 in the week ended Nov. 3, the Labor Department said today in Washington. A Bloomberg News survey had forecast claims for jobless benefits increased by 2,000 to 365,000 last week.
“Jobless claims are likely to be distorted by the hurricane impact, so people are likely to dismiss any unexpected drop there,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut, said before the report.