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Treasury Five-Year Butterfly Yield at Five-Month Low Before Sale

Treasury five-year notes were the most expensive since June relative to two- and seven-year securities before the U.S. sells $35 billion of 2018 debt today.

The butterfly spread measuring yield differences was 31.9 basis points, the lowest since June 18 based on closing levels, reflecting demand for the middle security over the other two. Five-year notes offer more yield than shorter maturities, while the Federal Reserve is considering trimming its purchases of long-term debt as economic growth quickens. A $32 billion sale of two-year notes yesterday drew above-average demand.

“We’ve seen great buying at the front end of the curve since last week,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed. “It rolls along the lines of not fighting the Fed.”

Benchmark 10-year yields dropped three basis points, or 0.03 percentage point, to 2.70 percent as of 11:29 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.75 percent security due in November 2023 rose 7/32, or $2.19 per $1,000 face value, to 100 13/32.

U.S. five-year note yields were at 1.32 percent. That’s 1.04 percentage points more than investors get from two-year notes, versus an average of 83 basis points this year.

Treasuries due in one to five years have returned 0.2 percent in 2013, while those maturing in five to 10 years have fallen 2.7 percent, based on Bloomberg World Bond Indexes.

Home Prices

Treasuries briefly erased gains after a report showed home prices in 20 U.S. cities rose by the most since February 2006 in the 12 months through September, showing the housing market sustained progress even as borrowing costs climbed.

The S&P/Case-Shiller index of property values advanced 13.3 percent after increasing 12.8 percent a month earlier, the group said in New York. The median forecast in a Bloomberg survey of 31 economists called for a 13 percent advance.

“It would take stronger data to get the market to sell off,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “It’s going to take something better than slightly better than expectations to move the market.”

The notes on sale today yielded 1.36 percent in pre-auction trading. At the previous five-year auction in October, investors bid for 2.65 times the amount of debt offered. The average at the last 10 of the monthly sales is 2.67.

Auction Bids

The two-year auction’s bid-to-cover ratio was 3.54, the most since April and above the average of 3.28 for the prior 10 sales before yesterday’s. This week’s auctions by the Treasury are scheduled to conclude with the sale of $29 billion of seven-year notes tomorrow.

Today’s sale “should see solid demand,” Marc Ostwald, a strategist at Monument Securities Ltd. in London wrote in a note to clients. “Today’s data schedule is quite modest.”

Fed policy makers have been emphasizing that the tapering of its $85 billion in monthly bond purchases isn’t a tightening of monetary policy. Chairman Ben S. Bernanke said last week that the benchmark interest rate will probably stay low long after the purchases end.

The Fed bought $1.57 billion of bonds maturing from February 2038 through August 2043 today.

The central bank has held its target for overnight lending between banks, the federal funds rate, in a range of zero to 0.25 percent for almost five years to support the economy.

Fed Policy

“The market is priced for the Fed to keep short-term yields low,” said Park Sungjin, who oversees $7 billion as head of asset management at Meritz Securities Co. in Seoul. “However, when the economy is recovering, long-term yields must rise. The five year is in the eye of the storm.”

Initial claims for jobless insurance increased and orders for durable goods fell, according to separate Bloomberg surveys of analysts before the data are released this week.

Janet Yellen, who is poised to succeed Bernanke as Fed chairman, will probably arrange tapering to ensure 10-year yields hold below 3 percent, said Kei Katayama, who buys non-yen debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $48.6 billion. An increase in borrowing costs past that level would hurt the housing market, he said.

“She doesn’t want longer yields to go up too much,” said Katayama, who prefers Treasuries due in five to 10 years.

Ten-year yields will increase to 3.06 percent by the middle of next year, according to a Bloomberg survey of financial companies, with the most recent projections given the heaviest weightings.

The U.S. bond market will be shut Nov. 28 for the Thanksgiving holiday, according to the Securities Industry and Financial Markets Association website. SIFMA recommended a 2 p.m. close in New York on Nov. 29.

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