Treasury 10-year note yields reached the highest level in almost four weeks before the U.S. sells $24 billion of the securities today.
The benchmark note pared losses as Treasury prepared to hold the second of three debt sales this week totaling $72 billion. A $32 billion auction of three-year notes yesterday drew bids for 3.38 times the amount offered, compared with an average of 3.57 for the past 10 sales. Yields jumped on May 3 as a U.S. Labor Department report showed employers hired more workers in April than economists predicted.
“Bonds are finding a level where there’s interest,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “The market traded off hard in the last couple of days on the employment numbers on Friday. The auction should go well today. There will be plenty of people bidding.”
The U.S. 10-year yield fell three basis points, or 0.03 percentage point, to 1.75 percent at 12:43 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 2 percent note due in February 2023 rose 7/32, or $2.19 per $1,000 face value, to 102 6/32. The yield reached the highest level since April 11.
The benchmark yield has increased from this year’s low of 1.61 percent set last week after a report showed the unemployment rate unexpectedly fell to a four-year low of 7.5 percent.
The difference between yields on 10- and 30-year debt widened to 1.22 percentage points, the most since April 5 and above the one-year average of 1.17 percentage points. Historically, a so-called steeper yield curve reflects diminishing demand from investors anticipating faster economic growth and inflation.
“The 10-year Treasury still offers a diversification benefit that few other assets enjoy,” William Irving, a Merrimack, New Hampshire-based money manager at Fidelity Investments, which oversees $1.6 trillion, said in an interview with Tom Keene on Bloomberg Radio. “Even though the yield is low, they still offer the possibility of going up in price when there is a flight to quality.”
The 10-year securities being auctioned today yielded 1.82 percent in pre-auction trading. The notes were sold at 1.795 percent last month, compared with a record-low auction yield of 1.459 percent set on July 11.
The previous 10-year auction on April 10 attracted bids for 2.79 times the amount of debt available, compared with 3.19 times on March 13.
Bidding has slowed at Treasury auctions this year, with the $753 billion in debt sales attracting an average of $3.02 in orders to buy per dollar of debt sold, compared with a record $3.15 in 2012, according to data released by the Treasury and compiled by Bloomberg.
“We’re at levels that are justified, given where the economy is at,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We had a month-and-a-half rally that people thought was the beginning of a new economic decline. We’re going to see better data and slightly higher yields.”
The government is scheduled to conclude this week’s auctions with a $16 billion sale of 30-year debt tomorrow.
The Fed bought $3.6 billion of Treasuries maturing between February 2019 and April 2020 today, according to the Fed Bank of New York’s website. The central bank is buying $85 billion of Treasury and mortgage debt each month to support the economy by putting downward pressure on borrowing costs.
U.S. 10-year notes have returned 0.5 percent this year, according to indexes compiled by Bank of America Merrill Lynch. Three-year securities gained 0.2 percent, while 30-year bonds lost 0.7 percent.