Treasuries Drop on Speculation Economic Recovery Strengthening

Treasuries declined for the first time in five days as the European Central Bank’s more optimistic outlook and signs of growth in China reduced investor demand for the refuge of U.S. government debt.

Thirty-year bonds briefly pared losses after the initial sale this year of $13 billion of the securities as yields above 3 percent prompted stronger-than-average demand. Investors felt comfortable buying the bonds at auction with the Federal Reserve pledging to buy $45 billion of Treasuries per month to help keep borrowing rates low to sustain the U.S. economic expansion.

“There is a more risk-on atmosphere developing,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that are required to bid at government-debt auctions. “With the risks we have ahead, the market is still confused on what the crisis premium should be, so we are exploring new levels.”

The yield on 30-year bonds rose two basis points, or 0.02 percentage point, to 3.08 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices, after rising as high as 3.10 percent. The benchmark 10-year note yield gained four basis points to 1.89 percent.

The bonds sold today drew a yield of 3.07 percent, compared with a forecast of 3.095 percent in a Bloomberg News survey of nine of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.77, tied for the highest since December 2011.

Bidder Participation

Indirect bidders, an investor class that includes foreign central banks, purchased 37.8 percent of the bonds, compared with an average of 34.4 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 16.7 percent of the bonds at the sale, compared with an average of 15.5 percent for the past 10 auctions.

“Anyway you cut it, it’s a good auction,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. Investors have “been buying because the yield is above 3 percent.”

The U.S. sold $21 billion of 10-year debt yesterday at a yield of 1.863 percent and auctioned $32 billion of three-year notes on Jan. 8 at a yield of 0.385 percent.

The sales this week will raise $24.4 billion of new cash, as maturing securities held by the public total $41.6 billion, according to the Treasury.

Economic Indicators

U.S. government debt declined after China’s exports increased 14.1 percent in December from a year earlier, the most since May, government figures showed. Imports grew 6 percent after being unchanged the previous month.

ECB President Mario Draghi said “a gradual recovery should start” later this year as the region’s bond markets stabilize after three years of turmoil. Central-bank policy makers kept their benchmark interest rate at 0.75 percent.

“People are more optimistic,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, a primary dealers. “The data is not great, but it’s OK.”

Fed Bank of Kansas City President Esther George said the central bank’s record stimulus may fuel the risk of financial instability and a surge in inflation. George holds a vote on the Federal Open Market Committee, which meets Jan. 29-30.

‘Financial Imbalances’

“A prolonged period of zero interest rates may substantially increase the risks of future financial imbalances and hamper attainment of the” Fed’s 2 percent inflation goal, George said today in a speech in Kansas City, Missouri.

Thirty-year bonds have handed investors a 2.3 percent loss in January after returning 2.5 percent last year, Bank of America Merrill Lynch indexes show. The broader U.S. Treasuries market has declined 0.45 percent.

The long bonds are among the securities most sensitive to consumer prices because of their long maturity, as inflation would erode the return on the bonds’ fixed payments for their duration.

The Fed purchased $3.162 billion in Treasury securities today maturing between February 2020 and November 2022 as part its monthly purchases.

The Fed for the first time in December linked the outlook for its main interest rate to unemployment and inflation targets. The central bank said the rate would stay close to zero “at least as long” as unemployment remains above 6.5 percent and inflation projections are for no more than 2.5 percent.

The central bank’s preferred measure of inflation expectations, the five-year, five-year forward break-even rate, was 2.87 percent, compared with a 2012 average of 2.6 percent. The gauge projects the expected pace of consumer price increases from 2018 to 2023.

The yield on the 30-year bond is forecast to rise to 3.4 percent by year-end, according to the median estimates of economists in a Bloomberg News survey.

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