Treasury Bonds Erode 2012 Gains Before Year’s 1st Auction

Thirty-year Treasuries fell, extending a January decline that almost wiped out 2012’s gain, as signs of strengthening economic growth renewed inflation concern before the first auction of the securities this year.

Benchmark 10-year notes fell for first time in five days as European Central Bank President Mario Draghi said the euro-area economy will slowly recover this year and inventories at U.S. wholesalers rose more than forecast. A report earlier showed China’s exports rose, fueling demand for riskier assets. U.S. 30-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.

“People are more optimistic,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers obligated to bid at U.S. government-debt auctions. “The data is not great, but it’s OK. Yields are a little bit too low. There’s scope for breaking 2.1 percent in the not too distant future. The auction with this back-up should go OK.”

Thirty-year yields increased two basis points, or 0.02 percentage point, to 3.08 percent at 11:18 a.m. New York time, based on Bloomberg Bond Trader prices. The 2.75 percent security due November 2042 fell 10/32, or $3.13 per $1,000 face amount, to 93 20/32.

The yield on benchmark 10-year notes rose three basis points to 1.89 percent. The yield last week jumped 20 basis points, touching 1.97 percent on Jan. 4, the highest since April 26.

Bond Sale

The yield on the 30-year bond is forecast to rise to 3.3 percent by year-end, according to the median estimates of economists in a Bloomberg News survey. The 10-year note is forecast to increase to 2.2 percent.

The 30-year bond scheduled for sale today yielded 3.10 percent in pre-auction trading, compared with 2.92 percent at the last offering on Dec. 13. The record auction low of 2.58 percent was set in July. Investors bid for 2.5 times the amount of the securities allotted last month.

“We’re pricing in a concession for the long bond reopening,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We could see a temporary push higher in yields but ultimately that will prove a buying opportunity.”

The Treasury sold $32 billion of three-year notes on Jan. 8 and $21 billion of 10-year securities yesterday.

Inflation Outlook

Thirty-year 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 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 today, compared with a 2012 average of 2.6 percent. The gauge projects the expected pace of consumer price increases from 2018 to 2023.

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.53 percentage points. The average over the past decade was 2.19 percentage points.

‘Upward Drift’

Treasuries of all maturities have handed investors a 0.5 percent loss this year, the Bank of America data show. The MSCI All-Country World Index of stocks rallied 2.1 percent including reinvested dividends, according to data compiled by Bloomberg.

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.

The 0.6 percent increase in wholesale stockpiles followed a 0.3 percent rise in October that was less than initially estimated, the Commerce Department said today in Washington. The median forecast in a Bloomberg survey called for a 0.2 percent gain. Sales jumped 2.3 percent, the most since March 2011, as auto demand rebounded from a Hurricane Sandy-related drop.

Treasury yields remained higher today as the ECB’s Draghi said the euro-area economy will slowly recover this year as the region’s bond markets stabilize after three years of turmoil.

“A gradual recovery should start” later this year as ECB measures work their way through the economy, Draghi said at a press conference in Frankfurt today after policy makers kept their benchmark interest rate at 0.75 percent.

The Fed purchased $3.162 billion in Treasury securities today maturing between February 2020 and November 2022 as part its monthly purchases of $85 billion of government and mortgage debt to spur the economy by putting downward pressure on interest rates.

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