Treasuries advanced for the first time in three days on demand before the U.S. sells $24 billion in 10-year notes at yields almost at the highest level at an auction of the maturity in two years.
U.S. debt rose as stocks fell and risk appetite ebbed with the yen reaching a seven-week high versus the dollar amid bets the Bank of Japan at its policy meeting tomorrow will refrain from adding to stimulus. The Treasury sold $32 billion in three-year notes yesterday and is scheduled to sell $16 billion in bonds tomorrow in three auctions this week totaling $72 billion.
“Equities have softened and Treasuries, which have sold off quite a bit of late, are offering much more attractive yields, which is helping to bring in buyers,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 21 primary dealers that trade with the Federal Reserve. “The yen rally into the day set the tone for the more bond-friendly backdrop.”
Benchmark 10-year yields declined three basis points, or 0.03 percentage point, to 2.61 percent at 11:10 a.m. New York time, according to Bloomberg Bond Trader data. The 1.75 percent note due in May 2023 rose 1/4, or $2.50 per $1,000 face amount, to 92 19/32.
The Standard & Poor’s 500 Index of U.S. stocks dropped 0.6 percent.
Ten-year note yields will rise to 2.75 percent by the end of the year, according to 63 economists surveyed by Bloomberg News from Aug. 2 to Aug 6. Yields on the 30-year bond will rise to 3.75 percent, according to a survey of 38 economists during the same period.
U.S. government bonds lost 2.8 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities fell 1.5 percent.
The 10-year notes being sold today yielded 2.63 percent in pre-auction trading. The previous 10-year auction on July 10 drew a yield of 2.67 percent, the highest level since July 2011.
Ten-year notes are at almost the cheapest they’ve been in more two years, according to the butterfly chart spread formed by Treasury five-, 10- and 30-year bond yields.
The spread, which measures how well the 10-year note is performing against the two other securities, is about 16 basis points, almost the highest since July 2011. A positive reading indicates investors are more bearish on the middle security, making it relatively cheap versus the others. The average during the past five years has been 12 basis points.
Ten-year notes “look relatively cheap on the curve,” George Goncalves, the head of interest-rate strategy in New York at Nomura Holdings Inc., a primary dealer, wrote in a note to clients. “The continued Fed-tapering talk hurts the intermediates most. There is significantly less uncertainty now regarding tapering compared with the July auction and we argue a large proportion is already priced in.”
The BOJ won’t expand stimulus at the end of its meeting tomorrow, according to all 25 economists surveyed by Bloomberg News. The central bank currently buys more than 7 trillion yen ($72 billion) of government bonds every month as part of its effort to increase annual inflation toward 2 percent in two years.
The yen has gained 4.5 percent over the past three months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro advanced 3.9 percent and the dollar strengthened 1.7 percent.
A $32 billion three-year sale yesterday drew the most demand in two years from the investor class that includes foreign central banks. Indirect bidders purchased 41.4 percent, the most since August 2011. The figure compared with an average of 26.1 percent at the previous 10 sales.
The securities were allotted at a yield of 0.631 percent, compared with a forecast of 0.636 percent in a Bloomberg News survey of eight primary dealers, the companies that underwrite the U.S. debt.
Investors bid $2.92 for each dollar of the $1.289 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.
The increase in yields is making Treasuries more appealing, said Yoshiyuki Suzuki, head of fixed income at Fukoku Mutual Life Insurance Co. in Tokyo, which has the equivalent of $58.5 billion in assets.
“U.S. government bonds have not been a good place to bet, but now is a good opportunity to invest,” Suzuki said. “Yields are getting more attractive.” Fukoku bought earlier this year, he said.
Treasuries trimmed gains along with German government bonds as a report showed industrial production in Europe’s largest economy rose more in June than analysts forecast. Output in Germany increased 2.4 percent from May, the Economy Ministry in Berlin said today. Economists forecast a gain of 0.3 percent, according to the median of 41 estimates in a Bloomberg survey.
Fed Bank of Chicago President Charles Evans indicated a tapering of the central bank’s bond-buying program in September is possible. The Fed is buying $85 billion of Treasuries and mortgage debt each month to put downward pressure on interest rates.
Evans said yesterday the central bank probably will have bought at least $1.2 trillion of bonds from January 2013 until the time he sees the current quantitative-easing program ending in mid-2014.
“We’ve seen good improvement in the labor market,” Evans said in Chicago. “I’m still wanting to see greater evidence that it’s a sustainable improvement” and “I would clearly not rule” out a decision to begin dialing back the purchases in September.