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Treasury 3- to 30-Year Yield Difference Widens Before Auctions

The difference between yields on Treasury three-year notes and 30-year bonds widened to the most in almost two years before the U.S. sells the securities as part of its auctions this week.

The so-called spread increased to 3.14 percentage points, the highest level since September 2011, according to closing price data compiled by Bloomberg. The gap signals investors are demanding higher yields to own bonds instead of riskier assets with potentially greater returns, such as stocks, as the economy grows. The U.S. is scheduled to sell $32 billion of three-year notes today, $24 billion of 10-year debt tomorrow and $16 billion of 30-year bonds on Aug. 8.

“The economy is improving,” said Hajime Nagata, who helps oversee the equivalent of $120.3 billion as an investor in Tokyo at Diam Co., a unit of Dai-ichi Life Insurance Co. “Thirty-year bonds are not favorable. People prefer to hold stocks.”

Benchmark 10-year yields were little changed at 2.65 percent as of 8:15 a.m. London time, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due in May 2023 was at 92 10/32. Yields were 0.60 percent on three-year notes and 3.74 percent for 30-year bonds.

U.S. notes and bonds due in a decade or more are the world’s worst-performing government securities, indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies show. The securities fell 10 percent in the three months ended yesterday, the biggest loss of 144 indexes.

Comparative Returns

Notes due in one to three years were little changed. Shorter-maturity Treasuries tend to track what the Fed does with its benchmark interest rate, which banks charge each other on overnight loans. Policy makers have kept the target for the rate in a range of zero to 0.25 percent since 2008.

Stocks in the MSCI All-Country World Index returned 2.7 percent including reinvested dividends, according to data compiled by Bloomberg.

The Reserve Bank of Australia cut its benchmark interest rates by a quarter point to a record low of 2.5 percent. The nation’s 10-year yield rose 14 basis points to 3.74 percent.

The last U.S. three-year auction on July 9 drew bids for 3.35 times the amount of debt offered. The average for the last 10 sales is 3.44 times.

Indirect bidders, the investor class that includes foreign central banks, bought 35.6 percent of the securities, the most at the monthly auctions since September.

Improving Economy

Treasuries fell yesterday as a report showed service industries expanded more than forecast in July, adding to signs the U.S. economy is improving and boosting speculation the Federal Reserve will reduce its stimulus program by year-end.

The Institute for Supply Management’s non-manufacturing index increased to 56 July from 52.2 the prior month. The median forecast in a Bloomberg News survey of economists called for a gain to 53.1.

Data today will show the trade deficit shrank and job openings increased, according to the surveys.

The Fed is buying $85 billion of Treasuries and mortgage debt each month to put downward pressure on interest rates.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index fell to 72.66 basis points yesterday, approaching the lowest level since May. The average in 2013 is 67 basis points.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was $197.8 billion. Volume this year has averaged $317.9 billion.

“Yields should slowly trend higher in response to better growth conditions, resulting in poor total returns,” Bob Doll, a senior investor at Nuveen Investments Inc., wrote on the company’s website yesterday. The Fed will “will begin to gradually wind down” its bond purchases after its September meeting, according to Doll, who helps oversee $224 billion at Chicago-based Nuveen.

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