Treasury 10-Year Yield Reaches Three-Week High Before AuctionsCordell Eddings and Daniel Kruger
Treasury 10-year note yields rose to a three-week high as the U.S. prepared to sell $72 billion of debt this week with the jobs market showing signs of recovery.
The U.S. will auction $32 billion in three-year notes tomorrow, $24 billion in 10-year notes the next day and $16 billion of 30-year bonds on May 9. The 10-year yield rose 11 basis points on May 3, the most since Sept. 14, after a report showed employment gained more than forecast in April and the unemployment rate fell to a four-year now.
“The good jobs report and the auctions are weighing on the market,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Federal Reserve. “One decent number aside, not much has changed, as the economy is still weak and the Fed is still buying. We are nearing the top of the yield range and these cheaper levels should bring in decent demand to the auction process.”
The benchmark 10-year note yield rose two basis points, or 0.02 percentage point, to 1.76 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2 percent note due in February 2023 fell 6/32, or $1.88 per $1,000 face value, to 102 4/32. The yield reached the highest since April 12.
Bond trading was closed in Europe and Asia for holidays.
Rates on Treasury one-month bills fell below zero for the first time since Dec. 31, reaching negative 0.005 percent.
Benchmark yields traded above the 200-day moving average for the first time since April 12. The difference between yields for U.S. debt maturing in two and 10 years widened to 1.56 percentage points, the most since April 10.
Benchmark 10-year note yields could fall as low as 1.5 percent by the middle of the year, Dominic Konstam, global head of interest-rates research in New York at Deutsche Bank AG, a primary dealer, wrote in a note to clients on May 3.
“The Fed retains a ‘wait and see’ stance with regard to the scope of the global slowdown,” he wrote. “This suggests to us that yields can continue to fall toward the cyclical lows until it becomes clear that either the slowdown was a transient pause that refreshes, or a more serious slowdown that warrants additional response.”
The $72 billion of debt sold this week comes as $59.6 billion of outstanding debt will be paid down and as the Federal Reserve is scheduled to buy as much as $12.3 billion in Treasuries this week.
Bidding has slowed at Treasury auctions this year, with the $721 billion in debt sales attracting an average of $3.01 in orders to buy per dollar of debt sold, compared with a record $3.15 in 2012, according to data released by the Treasury and compiled by Bloomberg.
“The auctions are going to fare pretty well because of the set-up we saw last week,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “There’s still demand for Treasury paper.”
Market-based expectations for the path of inflation in the next 10 years have moderated, with the difference between 10-year yields on Treasury Inflation-Protected Securities and U.S. debt not indexed for inflation narrowing to 2.30 percentage points, down from 2.59 percentage points on March 14. The difference, known as the break-even rate of inflation, equals the market’s forecast for the rate of increase in consumer prices.
Inflation rose 1 percent in March, the slowest since October 2009, according to the Fed’s preferred measure, the personal consumption expenditure index deflator. The index rose 1.3 percent in January and February.
“There are reasons why we’re at these yields,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.
Bond investors are gaining confidence that Fed Chairman Ben S. Bernanke will unwind the central bank’s unprecedented $3.3 trillion balance sheet without sparking a crash similar to 1994, when former Fed Chairman Alan Greenspan surprised the market by doubling benchmark lending rates in 12 months.
Though sovereign-debt levels have more than quadrupled to $23 trillion, yields for 10-year Treasuries are 5 percentage points lower than they were in 1994 and forward measures show the current 1.74 percent level rising only to 2.04 percent in a year. Policy makers’ forecasts of no rise in the target interest rate for overnight loans between banks until 2015 are damping yields in a market dominated by the Fed’s $1.84 trillion, or 15.4 percent of the $11.94 trillion in marketable U.S. debt.
The Federal Open Market Committee said in a statement following a two-day meeting in Washington on May 1 that it will maintain its bond buying at the current monthly pace of $85 billion and is prepared to raise or lower the level of purchases as economic conditions evolve. Policy makers also left in place their statement that they plan to hold the target rate around zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
Payrolls expanded by 165,000 workers last month following a revised 138,000 increase in March that was larger than first estimated, Labor Department figures showed May 3 in Washington. The median forecast of 90 economists surveyed by Bloomberg projected a 140,000 gain. The jobless rate fell to 7.5 percent, the lowest since December 2008.