Treasuries Fall Before U.S. $32 Billion Note Auction

Treasuries fell, pushing 10-year yields up to the highest level in two weeks, as the U.S. prepared to sell $32 billion in three-year debt in the first of three note and bond auctions this week totaling $66 billion.

Longer-term securities led the declines after a report showed German investor confidence jumped more than forecast this month. A gauge of U.S. inflation expectations reached the highest level in a month as Federal Reserve policy makers start a two-day meeting at which they’re forecast to decide to make additional bond purchases.

“There’s a big chunk of supply,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “It puts a little pressure on the market. The three-year auction won’t be a big deal. The front end has plenty of buyers.”

The yield on the 10-year note climbed four basis points, or 0.04 percentage point, to 1.65 percent at 11:36 a.m. New York time, according to Bloomberg Bond Trader prices. It touched 1.66 percent, the highest level since Nov. 27. The 1.625 percent security due in November 2022 fell 10/32, or $3.13 per $1,000 face amount, to 99 3/4.

The 10-year break-even rate, the difference between yields on the benchmark notes and comparable Treasury Inflation Protected Securities, touched 2.51 percentage points, the most since Nov. 7. The gap measures investor expectations for inflation over the life of the securities. It has increased for five consecutive days, the longest stretch in almost two months.

Thirty-year yields rose four basis points to 2.84 percent, the highest since Dec. 3.

Debt Auction

The three-year notes to be sold today yielded 0.33 percent in pre-auction trading, compared with a yield of 0.392 percent at the previous sale of the maturity on Nov. 6. They reached a record-low auction yield of 0.334 percent in September 2011.

Investors bid for 3.41 times the amount of debt that was offered at last month’s auction, down from a record 3.96 times at the Oct. 9 sale. Primary dealers, which trade directly with the Fed, bought 52.7 percent of the securities, the most in three months.

The U.S. is scheduled to auction $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds Dec. 13.

Short-term Treasuries may be supported by a potential flood of cash into the U.S. money markets if unlimited Federal Deposit Insurance Corp. coverage is allowed to lapse later this month as scheduled.

Inflow ‘Wave’

“There are enough people on the front end willing to be long,” Roth of Mitsubishi UFJ said, referring to bets that shorter-term securities will gain. “Everyone thinks the expiration of the TAG program will cause a wave of inflows.”

The FDIC’s expanded deposit insurance is part of the Transaction Account Guarantee Program, known as TAG. An emergency 2008 government provision providing unlimited insurance on certain bank accounts during the U.S. financial crisis to help prevent sudden withdrawals will expire at the end of the year unless Congress extends it.

There’s about $1.4 trillion sitting in banks’ non-interest-bearing transactions accounts that hold more than $250,000, the previous insurance ceiling, FDIC data show. It will become uninsured in January if Congress doesn’t act.

Investors in Treasuries increased bets in the week ended yesterday that the prices of the securities would drop, according to a survey by JPMorgan Chase & Co.

Net Shorts

The proportion of net shorts held steady at four percentage points, the same as the previous week, the survey showed. The percent of outright shorts, or bets the securities will fall in value, increased to 19 percent, from 17 percent the previous week, according to the survey.

The percent of outright longs rose to 15 percent, from 13, the survey said.

Investors cut neutral bets to 66 percent, from 70 percent, which matched the highest level since August.

The Fed will announce tomorrow after the policy meeting that it will begin buying $45 billion in Treasuries each month, pushing its balance sheet almost to $4 trillion, according to a Bloomberg survey of economists.

Forty-eight of 49 economists predict the Federal Open Market Committee will purchase the securities to bolster an existing program to buy $40 billion in mortgage bonds each month. Policy makers pledged in October to continue that plan until the labor market improves “substantially.”

Operation Twist

A program known as Operation Twist, in which the Fed sells shorter-maturity Treasuries and buys longer-dated debt, is due to expire at the end of the month. As part of the plan, the central bank purchased $1.4 billion of TIPS today due from January 2021 to February 2042.

The Fed bought $2.3 trillion of assets from 2008 to 2011 in two rounds of the stimulus strategy called quantitative easing.

Treasuries declined earlier as the ZEW Center for European Economic Research said its index of German investor and analyst expectations, which is designed to predict economic developments six months in advance, climbed to 6.9 this month from minus 15.7 in November. Economists in a Bloomberg survey predicted a gain to negative 11.5.

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