Treasuries Gain as Global Investors Boost Demand at Note Auction

  • U.S. $20 billion 10-year debt sale draws below-forecast yield
  • Reports show retail sales, wholesale prices fell in March

Treasury 10-year notes gained for the first time in four days after a $20 billion auction of the securities drew a lower-than-forecast yield.

The notes sold Wednesday yielded 1.765 percent, compared with an estimate of 1.780 percent in a Bloomberg survey. The Federal Reserve is gauging whether it can raise U.S. interest rates as central banks in Europe and Japan have boosted stimulus to combat slow global growth, dragging bond yields lower abroad.

“We had a very strong auction,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale SA, one of 22 primary dealers that trade with the Fed. “Bonds are driven a lot more by demand from overseas. If you look at bunds and JGBs on a relative basis, the 10-year part of the curve looks very attractive -- that’s your driving factor."

The 10-year note yield last week touched a two-month low as traders pared bets on the pace of Fed interest-rate increases. Officials last month left rates unchanged and cited global risks in lowering forecasts for hikes this year. The Citigroup U.S. Economic Surprise Index shows gauges of U.S. growth still trail economist forecasts even after they’ve narrowed the gap since earlier this year.

The benchmark 10-year note yield fell one basis point, or 0.01 percentage point, to 1.76 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 rose 3/32, or 94 cents per $1,000 face amount, to 98 3/4. The yield climbed five basis points Tuesday, the biggest increase since March 11.

Rate Outlook

Ten-year German bunds yielded 0.13 percent, while 10-year Japanese government bonds yielded negative 0.08 percent.

Indirect bidders, a class of investors that includes foreign central banks and mutual funds, bought 60 percent of the U.S. notes sold Wednesday, up from 56.5 percent at the March sale. The Treasury plans to sell $12 billion of 30-year bonds Thursday, after auctioning $24 billion of three-year securities Tuesday.

Separate reports Wednesday showed wholesale prices and retail sales fell unexpectedly in March. Data Thursday will show annual consumer-price inflation quickened in March, according to economists in a Bloomberg survey. 

Beige Book

Treasuries remained higher even after a Fed report showed the U.S. economy continued to expand from late February to early April, boosting employment and providing upward pressure on wages and prices. 

“Most districts said that economic growth was in the modest to moderate range and that contacts expected growth would remain in that range,” according to the Fed’s Beige Book, an economic survey published eight times a year.

Although the Beige Book was "pretty positive," the "relative weight of international developments gives the market some doubt the Fed is going to raise rates soon," said Thomas Simons, a money-market economist at primary dealer Jefferies Group LLC in New York.

Fed Path

Futures contracts indicate traders assign about a 51 percent chance that the Fed will raise rates this year after liftoff from near zero in December. The calculation assumes the effective fed funds rate will average 0.625 percent after the next hike.

Philadelphia Fed President Patrick Harker and Dallas Fed chief Robert Kaplan on Tuesday joined a recent chorus of officials arguing for caution over the timing of the next rate increase as global economic weakness hinders the central bank’s effort to boost inflation.

Richmond Fed President Jeffrey Lacker on Tuesday said adverse financial developments at the start of the year have “largely reversed,” and the inflation outlook “has firmed.”

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