Treasuries Decline Most Since September After ECB Report

Treasuries fell the most since September after data showed banks plan to repay more of the European Central Bank’s three-year loans than forecast, damping demand for safer assets.

The ECB said banks will pay back 137.2 billion euros ($184.4 billion) of its three-year loans, known as Longer-Term Refinancing Operations, next week. That compares with the median forecast of 84 billion euros in a Bloomberg News survey of economists. The difference between the yields on the two-year note and the 30-year bond, the so-called yield curve, was the widest since May. The U.S. will sell $99 billion in two-, five-and seven-year notes next week.

“The market is taking the relatively larger-than-expected paydown of the LTROs as a sign of strength in the banking sector,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We are in the process of backing up the market next week for supply.”

Benchmark 10-year yields rose 10 basis points, or 0.1 percentage point, to 1.95 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The yield rose the most since Sept. 14 and closed at the highest level since Jan. 4. The 1.625 percent note due November 2022 fell 7/8, or $8.75 per $1,000 face amount, to 97 1/8.

Treasury trading volume rose today to $361 billion, the most since Jan. 4, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The 2012 daily volume average is $240 billion.

Futures Bets

Today’s selloff surpassed the eight-basis point rise in yields posted on Jan. 2, when Congress broke an impasse about how to avert the so-called fiscal cliff by passing legislation to avoid income-tax increases for more than 99 percent of households. The U.S. House of Representatives voted on Jan. 23 to temporarily suspend the nation’s borrowing limit.

Hedge-fund managers and other large speculators increased their net-long position in 10-year note futures in the week ending Jan. 22, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 66,723 contracts on the Chicago Board of Trade, the most since Jan. 4. Net-long positions rose 144 percent, by 39,425 contracts from a week earlier, the biggest weekly jump since November, the Washington-based commission said in its Commitments of Traders report.

Position Reversal

Speculators reversed from a net-short position to a net-long position in five-year note futures in the week ending Jan. 22, after being net short since Dec. 4, according to CFTC data. Bets prices will rise outnumbered short positions by 42,538 contracts. Last week, traders were net-short 11,789 contracts.

Treasuries returned 2.2 percent in 2012, versus a loss of 0.36 percent this year, according to Bank of America Merrill Lynch data as of yesterday.

Benchmark yields rose today as 278 banks took advantage of the first opportunity for early repayment to the ECB. The Frankfurt-based central bank flooded financial markets with two tranches of three-year loans a year ago to avert a credit crunch after banks stopped lending because of Europe’s sovereign-debt crisis.

The U.S. added 155,000 jobs in January, a report from the Labor Department on Feb. 1 is forecast to show. The pace of jobs growth averaged 153,000 in 2012, according to Bloomberg data.

Fed Buying

The Federal Open Market Committee will meet for two days ending Jan. 30, the first meeting after the central bank started its latest purchase program.

The Fed purchased $3.708 billion of Treasuries maturing from October 2018 to December 2019 today as part of its strategy to buy $85 billion of government and mortgage debt each month to put downward pressure on borrowing costs.

“It looks like we could retest 1.97 percent on the 10-year, but every time there’s a big dip there are good buyers, so I’d be wary of selling down here,” said Brian Edmonds, head of interest rates at primary dealer Cantor Fitzgerald LP in New York. “The Fed is still buying -- that keeps us from rising to new highs.”

The 10-year yield touched 1.97 percent on Jan. 4 for the first time since April 26.

The U.S. will sell $35 billion in two-year notes, an equal amount in five-year notes and $29 billion in seven-year notes on three consecutive days starting Jan. 28.

The yield difference between the 30-year and the two-year widened to 2.86 percentage points. The gap has averaged 2.23 percentage points over the past 10 years, according to Bloomberg data.

A yield curve plots the rates of bonds of the same quality and different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously.

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