Treasury Three-Year Yields Are Double May’s Levels Before Sale
Treasury three-year notes yielded more than double their levels in May before the U.S. sells $32 billion of the securities amid speculation the Federal Reserve is preparing to reduce debt purchases.
The three-year notes being sold today yielded 0.715 percent in pre-auction trading, compared with a yield of 0.354 percent at the May 28 auction of the securities. The U.S. is due to sell $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds on July 11. Yields have increased on bets the U.S. economy is strong enough to allow Fed Chairman Ben S. Bernanke and policy makers to start trimming the asset buying that has helped cap borrowing costs. The Fed will release minutes of its June 18-19 meeting tomorrow.
“There’s demand for short-term Treasuries -- the auction should do fairly well,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers obligated to bid at U.S. debt auctions. “People are looking at what happens with Bernanke. Tapering may be done by middle of next year. They are looking to him for dimensions on how they plan to do it, and are they still as data dependent as they were.”
The benchmark 10-year yield fell two basis points, or 0.02 percentage point, to 2.62 percent. The 1.75 percent note maturing in May 2023 rose 1/8, or $1.25 per $1,000 face value, to 92 15/32.
Ten-year yields jumped 24 basis points on July 5 when the government reported the economy added 195,000 jobs in June, compared with the median forecast of 165,000 in a Bloomberg News survey of analysts. Treasuries rose yesterday amid speculation the yield surge had been too rapid.
The U.S. 10-year yield’s 14-day relative strength index was at 67 after rising to 77 on July 5, above the level of 70 that some traders see as a sign a reversal is imminent.
Investors in Treasuries remained net short this week even as they trimmed the bets that prices of the securities will drop, according to a survey by JPMorgan Chase & Co.
The proportion of net shorts was at 4 percentage points in the week ending yesterday, down from 6 percentage points in the previous week, according to JPMorgan.
Outright longs, or bets the securities will increase in value, rose to 15 percent, from 13 percent, the survey said, while outright shorts remained at 19 percent. Investors cut neutral bets to 66 percent from 68 percent.
“I don’t think Treasuries are going to rally any further,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “We think they can cheapen up into the three-year auction. There isn’t a lot of data so it’s really an auction play this week. I’m a seller at 2.65 percent.”
U.S. three-year notes handed investors a loss of 0.5 percent this year through yesterday, according to Bank of America Merrill Lynch indexes. Ten-year notes dropped 6.2 percent and 30-year bonds tumbled 11 percent, the data show.
At the previous auction of three-year notes on June 11, investors bid for 2.95 times the amount available, the lowest level since December 2010.
Indirect bidders, the investor class that includes foreign central banks, purchased 33.1 percent of the securities, the most since September. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.4 percent, the lowest since August.
“You’ve had a tremendous move in three-year yields -- demand will be OK,” said Dan Greenhaus, chief global strategist in New York at broker-dealer BTIG LLC.
The bias is to the downside, Greenhaus said, adding that Treasury yields may drop before ultimately moving higher again.
The central bank is buying $85 billion of bonds a month to put downward pressure on borrowing costs. Bernanke said on June 19 that policy makers may begin slowing purchases this year should the U.S. economy meet the central bank’s goals.
Global growth will be 3.1 percent this year, unchanged from the 2012 rate, and less than the 3.3 percent forecast in April, the Washington-based fund said today, trimming its prediction for this year a fifth consecutive time. The IMF reduced its 2013 projection for the U.S. to 1.7 percent growth from 1.9 percent in April, while next year’s outlook was trimmed to 2.7 percent from 3 percent initially reported in April.
Reuters reported that European Central Bank Executive-Board Member Joerg Asmussen said policy makers’ forward guidance, that interest rates will stay low for an extended period, goes beyond a year.
The Fed has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008. It has said it will consider raising the target when unemployment falls to 6.5 percent, versus 7.6 percent as of June.
Thirty-day federal funds futures for delivery in March 2015 yielded 0.52 percent, indicating investors expect Fed rates to be higher by then. The contract settles at the average overnight fed funds rate for the delivery month.
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index fell to 107.78 yesterday from 117.89 at the end of last week, which was the highest level since December 2010.
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