Treasuries fell on speculation the rally that pushed 10-year yields to the lowest in 20 months went too far too fast before today’s $21 billion auction of the securities.
The 10-year auction yield is poised to be the lowest since May 2013 as a slump in commodities price has damped the outlook for inflation. Treasuries have gained 1.5 percent this year, after returning 6.2 percent last year, the most since 2011, according to Bloomberg U.S. Treasury Bond Index. Commodities prices fell to a 12-year low, fueling speculation the Federal Reserve will take a cautious approach to raising interest rates.
“Ten years at these low yields will be a test to see where demand is,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the Fed. The central bank is “still on track for the rate hike and beginning lift off in the middle of this year.”
The U.S. 10-year yield rose two basis points, or 0.02 percentage point, to 1.93 percent at 11:36 a.m. New York time, after falling to 1.8622 percent earlier, matching the low on Oct. 15 that was the least since May 2013. The 2.25 percent note due in November 2024 traded at 102 26/32, according to Bloomberg Bond Trader prices.
Thirty-year yields touched 2.46 percent, the lowest since July 2012, when they set a record low of 2.44 percent.
A worldwide rally in sovereign bonds pushed the effective yield on securities tracked by the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index to 1.21 percent yesterday, the least in data going back to 1996.
Treasuries investors turned bearish in the week ended yesterday, according to a survey by JPMorgan Chase & Co. Investors increased the proportion of net shorts to nine percentage points, from zero the previous week, according to the survey.
Outright longs were cut to 13 percent, from 17 percent the previous week. The figure represents the least longs since Oct. 27. Outright shorts, bets the securities would fall in value, rose to 22 percent, from 17 percent, which had been the least since February.
The $21 billion of 10-year Treasuries scheduled for sale today yielded 1.94 percent in pre-auction trading. That would be the lowest level at the monthly auctions since May 2013.
At the previous sale of the benchmark securities in December, investors bid for 2.97 times the amount of debt offered, the highest since March 2013.
The U.S. sold $24 billion of three-year notes yesterday, and it plans to auction $13 billion of 30-year bonds tomorrow.
Government bonds have surged this year as oil tumbled more than 55 percent since June and copper sank to the lowest since 2009, dimming the outlook for consumer prices.
The Bloomberg Commodity Index reached its lowest level since 2002. Crude oil futures declined 0.5 percent to $45.82 a barrel in New York, after reaching the lowest level since April 2009.
The difference between yields on 10-year Treasuries and similar-maturity Treasury Inflation Protected Securities, a gauge of market expectations for consumer prices, was at 1.53 percentage points, the least since 2010.
Fed officials said they plan to raise interest rates later this year after holding their target for the federal funds rate at virtually zero since December 2008 to bolster economic growth.
“There’s no meaningful sign of inflation yet and that will keep the Fed from moving forward the date of the first hike,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.
Slower inflation may also prompt central banks to extend stimulus, keeping down borrowing costs to fulfill their mandates. The European Central Bank may make a decision on whether to start buying government debt as soon as its Jan. 22 meeting, Executive Board member Benoit Coeure was quoted as saying in an interview with Die Welt.
The Bank of America sovereign index has returned 3.1 percent in the three months ended yesterday. The MSCI All-Country World Index of shares advanced 3 percent, including reinvested dividends.
U.S. debt maturing in five years yielded more than similar maturities in 19 developed nations, according to data compiled by Bloomberg. The U.S. notes yielded 1.37 percent, while yields were at negative levels in Switzerland, Japan and Germany.