U.S. Bonds Rise as Highest Auction Yield Since May Boosts Demand

Treasury 30-year bonds rose for the first time in four days as the highest yields at a U.S. auction of the securities since May bolstered demand at today’s government sale of $16 billion of the debt.

The long bonds drew a yield of 3.180 percent, compared with an average forecast of 3.195 percent in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.74, versus an average of 2.62 at the past 10 offerings. Thirty-year yields touched 3.24 percent yesterday, almost the highest since April.

“This was a very good auction on a day when you had almost continued rally, which emphasizes that there is still demand for Treasuries at these levels,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, which as a primary dealer is obliged to bid in U.S. debt sales. “The strength of the rally reemphasizes the lack of a trend change, and that we are still in a bullish environment with Treasuries.”

The yield on current 30-year bonds maturing in November 2042 dropped six basis points, or 0.06 percentage point, to 3.18 percent at 3:06 p.m. in New York, according to Bloomberg Bond Trader Prices. Yields on benchmark 10-year notes fell three basis points to 2 percent.

Indirect bidders, an investor class that includes foreign central banks, purchased 36.4 percent of the bonds sold today, compared with 37.8 percent at the Jan. 10 sale and an average of

35.3 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 14.5 percent at today’s sale, compared with 16.7 percent at the previous sale, and an average of 15.7 percent for the past 10.

Bond Loss

Thirty-year bonds have lost 5.2 percent this year, compared with a 1.1 percent decline in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes.

The U.S. sold $24 billion of 10-year debt yesterday at a yield of 2.046 percent. That was the highest since March and compared with a forecast of 2.039 percent in a Bloomberg News survey of eight primary dealers. The U.S. auctioned $32 billion of three-year notes on Feb. 12 at a yield of 0.411 percent, higher than the 0.409 percent average forecast in a Bloomberg News survey.

The sales this week raise $8 billion of new cash, as maturing securities held by the public total $64 billion, according to the Treasury.

Inflation Outlook

U.S. 30-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 the jobless rate stays 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, touched 2.93 percent on Feb. 11, close to the highest level since August 2011. The gauge projects the expected pace of consumer price increases from 2018 to 2023. The 2012 average is

2.6 percent.

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

Euro Region

Treasuries climbed earlier as a report showed the euro-area economy shrank 0.6 percent in the final three months of 2012, the worst performance in almost four years, amid slumping output in its three leading economies.

The German economy, Europe’s largest, shrank 0.6 percent in the fourth quarter, while French gross domestic product fell 0.3 percent. Both contractions exceeded the median forecasts of economists. Italy’s economy shrank 0.9 percent, also more than expected and a sixth straight contraction.

“The overnight news around the world was very weak, underscoring weak global growth, which has led to safe haven buying,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.

U.S. government securities pared gains after a government report showed claims for unemployment benefits dropped by 27,000 the most in a month, to 341,000 in the period ended Feb. 9, compared with 366,000 a week earlier. The forecast was for a drop to 360,000, according to the median estimate of economists surveyed by Bloomberg.

Ascending Channel

The 10-year note yield is exhibiting an ascending channel pattern, where the yield shows higher highs and higher lows over time, according to Royal Bank of Canada, citing technical analysis. A close above 2.06 percent on the security will signal a further rise in yield. The bearish momentum will stay in place unless the notes’ yield falls below 1.92 percent, Royal Bank’s analysis shows.

“The price action suggests that the market is still looking to sell into rallies than buy on dips in prices,” said George Davis, chief technical analyst for fixed-income in Toronto at Royal Bank’s RBC Capital Markets unit. “The rallies are getting weaker and yields continue to creep higher, suggesting we are still in a bearish environment and the path of least resistance is higher yields.”

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