Treasury 10-Year Yields Approach 5-Week High Amid Budget Talks

Treasuries fell, pushing 10-year note yields toward a five-week high, as investors weighed prospects for a budget deal in Washington and the U.S. prepared to sell $35 billion in two-year notes.

Benchmark 10-year notes pared their slide after House Speaker John Boehner signaled last week he’s open to allowing tax rates to rise for millionaires. The Treasury will auction $113 billion in notes this week. China increased its holdings of Treasuries in October, data showed.

“People will be trading on any rhetoric on the fiscal cliff, both positive and negative,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “That will be the main driver for yields in the market. There’s a decent amount of supply coming to market. It’s weighing a bit on the market.”

The yield on the 10-year Treasury note increased three basis points, or 0.03 percentage point, to 1.73 percent at 11:32 a.m. New York time. It touched 1.74 percent, after reaching 1.75 percent on Dec. 14, the highest level since Nov. 7.

The note’s losses were tempered as its yields failed to breach 1.75 percent, their 200-day moving average.

The price of the 1.625 percent security due in November 2022 fell 9/32, or $2.81 per $1,000 face amount, to 99 1/32.

Return Declines

Treasuries have returned 2.3 percent this year, set for the worst performance since a 3.7 percent decline in 2009, a Bank of America Merrill Lynch index shows. The Standard & Poor’s 500 Index of U.S. stocks has returned 16 percent, including reinvested dividends, after a 2.1 percent return last year.

U.S. government bonds were little changed this quarter and have fallen 0.4 percent this month, Merrill data show.

The two-year notes to be sold today yielded 0.245 percent in pre-auction trading, compared with 0.27 percent at a previous sale on Nov. 27. The record low auction yield was 0.22 percent in July.

The U.S. also will sell this week $35 billion of five-year notes tomorrow and $29 billion of seven-year debt a day later. It will auction $14 billion in five-year Treasury Inflation Protected Securities on Dec. 20.

“The auctions will go fine,” said Jeffry Feigenwinter, head of Treasury trading in New York at Societe Generale SA, one of 21 primary dealers that trade Treasuries with the Federal Reserve. “The biggest factor in the market is the situation in Washington,” They may be closer to a compromise. I’m hopeful.”

Budget Showdown

Boehner offered to raise income tax rates on households earning more than $1 million a year in exchange for containing the cost of federal entitlement programs, as part of a deal with President Barack Obama to cut the federal deficit, according to two people familiar with the talks. The U.S. faces more than $600 billion of automatic spending cuts and tax boosts if lawmakers fail to reach an accord, and the Congressional Budget Office has said a recession could result.

Boehner’s offer, made in a Dec. 14 phone call between the two leaders, marked the first time Boehner entertained an increase in income-tax rates in his talks with Obama. Republicans and Democrats in Congress also are starting to talk about the benefits of waiting until January to reach a deal.

China, the largest foreign holder of Treasuries, boosted its holdings of the securities by $7.9 billion, or 0.7 percent, in October during the U.S. presidential election campaign, to $1.1615 trillion, Treasury data showed today. China held $1.153.6 trillion of Treasuries in September, a decrease from the $1.1555 trillion reported for the previous month.

Monthly Basis

The Treasury is now revising holdings data on a monthly basis rather than annually based on the nationality of the beneficial holder of the debt, while the initial data will still count the location of the purchase. For the year, China’s holdings have increased 0.8 percent.

China held 10.7 percent of publicly traded U.S. government securities in October, the smallest share since March 2008, when it held 10.4 percent of the debt, government data show.

Japan’s holdings of U.S. government debt rose $5.2 billion, or 0.5 percent, to $1.1347 trillion, Treasury data show. The country is the second-largest foreign lender to the U.S.

Treasury yields remained higher even as the Fed Bank of New York said its general economic index for the New York area dropped to minus 8.1, the fifth month of contraction, from 5.2 in November. The median estimate of 55 economists in a Bloomberg News survey called for minus 1. Readings of less than zero signal contraction.

Less Costly

U.S. government bonds traded today at the least expensive levels in more than five weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.82 percent, the least costly since Nov. 6.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.77 percent.

The Fed bought $4.9 billion of Treasuries today maturing from February 2019 to May 2020, according to the New York Fed’s website. The purchase was part of the Operation Twist program, under which the central bank replaces shorter-maturity notes in its holdings with longer-dated debt.

The program is set to expire this month, and the Fed will expand another program of $40 billion of mortgage-bond purchases each month with $45 billion of Treasury acquisitions. The new purchases won’t involve selling shorter-term securities.

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