Treasuries Decline as Reports Suggest Support for QE Tapering
Treasuries fell for the first time this week as better-than-forecast data on jobless claims and regional manufacturing suggested a strengthening economy will allow the Federal Reserve to slow asset purchases.
U.S. debt remained lower after the nation’s Aaa credit rating was revised to stable from negative by Moody’s Investor’s Service. Benchmark 10-year note yields touched a two-week low yesterday after Chairman Ben S. Bernanke said the central bank’s bond buys “are by no means on a preset course.” Speaking today, he said it was “way too early to make any judgment” about tapering starting in September. The Treasury sold 10-year inflation-protected securities with a positive yield for the first time in almost two years.
“We’re in a recovery phase, albeit slower than most people thought it was going to be,” said James Caron, who manages money in New York at Morgan Stanley Investment Management, which oversees $62 billion in fixed-income assets. “The overarching message is still the Fed is looking to remove some accommodation at some point in time, and the market’s having a difficult time rallying even on dovish comments.”
Treasury 10-year yields rose four basis points, or 0.04 percentage point, to 2.53 percent as of 5 p.m. New York time after reaching 2.46 percent yesterday, the lowest since July 3. The 1.75 percent note due in May 2023 declined 10/32, or $3.13 per $1,000 face amount, to 93 1/4.
Ten-year yields fell seven of the previous eight days, erasing their 24-basis point advance on July 5 when a report showed U.S. employers added more jobs than forecast in June.
The U.S.’s top-ranked rating was also affirmed, New York-based Moody’s said in a statement. The outlook had been negative outlook since August 2011.
Budget deficits have been falling and are expected to continue to decline over the next few years, Moody’s said. Growth in the U.S. economy, while moderate, is progressing at a faster rate compared with several Aaa peers and has demonstrated a degree of resilience to major reductions in the growth of government spending, the company said.
“Clearly the Moody’s news is a positive,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “This shows we are still the best house in a bad neighborhood. It doesn’t have a big impact on Treasuries in the short term, as the credit-quality story has fallen to the back burner. But, longer term, it’s good news.”
The Treasury auction of $15 billion in 10-year TIPS drew a yield of 0.384 percent, the highest since July 2011 and first above zero since November of that year. It compared with a forecast of 0.399 percent in a survey of seven of the Fed’s 21 primary dealers required to bid on U.S. debt sales.
“The TIPS market got ahead of itself and is still too rich and has overpriced demand,” said Aaron Kohli, an interest-rate strategist in New York at primary dealer BNP Paribas SA. “The economy hasn’t seen inflation pressure to justify TIPS strength.”
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.44, versus 2.68 for the past 10 auctions.
Indirect bidders, a class of investors that includes foreign central banks, bought 57.7 percent of the 10-year TIPS auctioned. They purchased 56.8 percent at the May sale. The average for the past 10 offerings is 47.1 percent.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 6.9 percent, versus 12.4 percent at the May auction. The average at the past 10 sales is 12.4 percent.
The Treasury Department will auction $35 billion of two-year debt, $35 billion of five-year notes and $29 billion of seven-year securities on consecutive days starting on July 23. The government sells this combination of debt every month.
Jobless claims dropped by 24,000 to 334,000 in the week ended July 13, the fewest since early May, from a revised 358,000 the prior period, Labor Department figures showed today in Washington. The median forecast of 49 economists surveyed by Bloomberg projected 345,000.
The Fed Bank of Philadelphia’s general economic index increased to 19.8 in July from 12.5 the prior month. The median forecast of 57 economists surveyed by Bloomberg for the Philadelphia Fed index called for a reading of 8. Readings greater than zero signal expansion in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware.
“We are living in a world that’s very much data dependent, as Bernanke has been signaling,” said Gabriel Mann, a U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities Inc. in Stamford, Connecticut, one of 21 primary dealers that trade with the Fed. “The data points that matter most are employment-related. Philly Fed is less important in that schema, but still important.”
The Fed could keep buying bonds for longer if “financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives,” Bernanke said yesterday in testimony to the House Financial Services Committee.
At their most recent meeting last month, members of the Federal Open Market Committee decided to maintain purchases of Treasuries and mortgage-backed securities at a rate of $85 billion a month as part of a policy known as quantitative easing, and kept the central bank’s benchmark rate at between zero and 0.25 percent. The FOMC next meets July 30-31.
As of yesterday, investors saw a 40 percent chance policy makers will raise the federal funds rate to 0.5 percent or higher by the end of 2014. That compared with 53 percent odds on July 10, according to data compiled by Bloomberg.
The difference in yield between 30-year notes and similar-maturity TIPS, a measure of trader expectations for inflation over the life of the debt, called the break-even rate, was 2.28 percentage points, almost the highest close since June 4. That compares with an average of 2.42 percentage points in the past year.
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