Short-Term Treasuries Drop as Demand Ebbs on Global Stocks Rally

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Shorter-term Treasuries fell as demand for haven assets declined amid a Federal Reserve-powered global stock-market rally.

Equities from Asia and Europe to Canada and Mexico rose as investors bet that lower-than-forecast job gains will convince U.S. policy makers to keep flooding the market with cheap dollars. Treasuries due in seven years and less remained lower after the U.S. sold $24 billion in three-year notes at the lowest auction yield in more than a year. Thirty-year bonds gained on demand linked to unwinding hedges for corporate-bond sales.

“It’s a bit of a risk-on move, with global equities up in this bad-is-good, central-bank dominated marketplace, where bad economic numbers means we’ll be Fed-accommodative,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “Psychologically, there’s a fear that the Fed’s going to start a tightening cycle.”

Yields on current Treasury three-year notes rose two basis points, or 0.02 percentage point, to 0.83 percent as of 5 p.m. New York time after adding three basis points on Monday. The price of the 1 percent note due in March 2018 fell 2/32, or 63 cents per $1,000 face amount, to 100 1/2.

The benchmark 10-year note yield was little changed at 1.88 percent after climbing six basis points Monday. Thirty-year bond yields fell three basis points to 2.52 percent.

The Stoxx Europe 600 Index climbed 1.6 percent, Japan’s Topix Index added 1.1 percent, the Mexican IPC Index gained 0.3 percent and Canada’s S&P/TSX Composite Index rose 0.6 percent. The Standard & Poor’s 500 slid 0.2 percent after rising as much as 0.4 percent.

‘Extraordinarily Patient’

Stocks gained as Minneapolis Fed President Narayana Kocherlakota said policy makers “should be extraordinarily patient about reducing the level of monetary accommodation,” and raising the fed funds rate would be a “mistake” this year.

Given the outlook for employment and low inflation, policy makers “can be both late and slow” in reducing accommodation, Kocherlakota, who doesn’t vote this year, said in a text prepared for delivery Tuesday in Bismarck, North Dakota. The Fed publishes minutes of its March policy meeting on Wednesday.

Treasury yields dropped April 3 after the Labor Department said U.S. payrolls increased by 126,000 in March after gaining at least 200,000 for 12 consecutive months. That, along with inflation remaining below the Fed’s 2 percent target, pushed back speculation for an interest-rate increase.

Corporate Debt

There’s a 30 percent chance policy makers will increase borrowing costs from virtually zero by their September meeting, down from 34 percent odds before the payrolls report last week, according to futures data compiled by Bloomberg.

Tuesday’s three-year notes auction was rated a “3” by five of the Fed’s 22 primary dealers on a scale of one through five.

The securities yielded 0.865 percent, the least since March 2014 and compared with an average forecast of 0.863 percent in a survey of eight primary dealers. Last month’s sale of the notes yielded 1.104 percent.

The U.S. is scheduled to sell $21 billion of 10-year notes on Wednesday, followed by $13 billion of 30-year bonds the following day.

“There are some corporate-deal pricings” driving 30-year gains, said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut,

Monsanto Co. sold $800 million of bonds, including $500 million of 30-year securities. Dealers underwriting corporate debt often make trades against Treasuries as a hedge to lock in interest rates on bonds they are preparing to sell, and then buy back the government debt at the end of the deal.

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