Treasuries Fall Before $32 Billion Three-Year Note SaleCordell Eddings and Daniel Kruger
Treasuries declined, with 10-year yields at the highest level in three weeks, before U.S. sells $32 billion of three-year notes today, the first of three auctions this week for $72 billion.
Yields on 10-year notes rose the most in seven months after the Labor Department said May 3 that the U.S. added more jobs than forecast last month and the unemployment rate fell to a four-year low. The securities are at almost the least expensive in a month, according to the 10-year term premium. The U.S. is scheduled to sell $24 billion of 10-year debt tomorrow and $16 billion of 30-year bonds on May 9.
“Given the employment report, the market’s a lot cheaper,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Federal Reserve. “The market’s pulled back nicely. It’s a good environment for the auctions.”
The U.S. 10-year note yield climbed two basis points, or 0.02 percentage point, to 1.78 percent at 11:51 a.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2023 fell 6/32, or $1.88 per $1,000 face amount, to 101 31/32. The yield climbed to the highest since April 12.
The 10-year yield traded above its 200-day moving average for a second day, an indication it may rise.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was at minus 0.73 percent, the closest to zero since April 2. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Yields surged last week, with the 10-year rising 11 basis points, as stronger-than-forecast jobs data increased optimism that the U.S. economy is gathering pace.
“The number on Friday was a good number, and pushed back some of the deflation concerns, but it wasn’t a homerun number,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “We are still in a range and how the auctions are dealt with will determine where we go from here, especially the long end auctions.”
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 April three-year note offering’s bid-to-cover ratio was 3.24, after reaching a record 3.96 at the October sale. The average at the past 10 auctions was 3.57.
Indirect bidders, a class of investors that includes foreign central banks, bought 19 percent of the notes at the April 9 sale after being awarded 20.6 percent the month before. That compared with an average of 25.8 percent at the past 10 offerings.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 16.2 percent of the securities at the last sale, compared with a record high 26.9 percent at the February offering and an average of 19.5 percent at the past 10 auctions.
The sales will raise $12.4 billion of new cash, as maturing securities held by the public total $59.6 billion, according to the Treasury.
President Barack Obama on Feb. 4 signed legislation suspending the $16.4 trillion debt limit through May 18. The Treasury said on May 1 it can use “extraordinary measures” to meet its obligations and to stay under the ceiling “for a period of time after May 19.”
Investors will favor U.S. shares over bonds, said Jeremy Siegel, a professor at the University of Pennsylvania’s Wharton School and author of the book “Stocks for the Long Run.” Job gains will lead Fed officials to consider scaling back bond purchases, known as quantitative easing, he said.
The Fed is buying $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on borrowing costs. The central bank bought $1.5 billion of Treasuries due from February 2036 to February 2043 today, according to the Fed Bank of New York’s website.
“You’re going to get some continued rotation out of bonds, out of bank accounts, out of money funds,” Siegel said yesterday on Bloomberg Television’s “Street Smart” with Trish Regan and Adam Johnson. “All we need is a couple more strong employment figures. You’re going to hear more people from the Fed saying, ‘Yeah maybe we should taper off QE.’ You’re going to see that 10-year note go to 2.5 percent before you can turn around.”
Treasuries have fallen 0.5 percent this month as of yesterday, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index returned 1.3 percent including reinvested dividends, according to data compiled by Bloomberg.
“We have had a big shift with the jobs print,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “Momentum is going to be negative for Treasuries this week.”