U.S. 10-Year Yield at 1-Year High as Sale Bids Lowest Since 2011Cordell Eddings and Daniel Kruger
Treasuries fell, pushing 10-year note yields to the highest since April 2012, as the U.S. sale of $35 billion in two-year debt attracted the fewest bids for the securities since February 2011.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.04, compared with an average of 3.72 for the past 10 sales. The benchmark 10-year note yield rose the most in 19 months as a report showed consumer confidence in May reached the strongest in more than five years while Federal Reserve Chairman Ben S. Bernanke said last week the central bank could cut the pace of asset purchases if officials see indications of sustained improvement in economic growth.
“It was a disappointing auction,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 21 primary dealers that are obligated to bid at U.S. government debt offerings. “Everyone’s scared of catching a falling knife.”
Benchmark 10-year yields climbed 16 basis points, or 0.16 percentage point, to 2.17 percent at 5:03 p.m. New York time, according to Bloomberg Bond Trader data. The 1.75 percent note due May 2023 slid 1 3/8, or $13.75 per $1,000 face amount, to 96 9/32. The decline was the biggest since October 2011 and the yield reached the highest level since April 6, 2012.
Thirty-year bonds fell more than two points, with the yield rising 15 basis points to 3.32 percent, touching the most since April 2012.
The two-year notes drew a yield of 0.283 percent, compared with a forecast of 0.277 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The yield on the current two-year note rose four basis points to 0.29 percent.
Non-primary dealers bought the fewest of the $35 billion two-year notes since April 2009, with indirect bidders, an investor class that includes foreign central banks, purchasing
21.9 percent of the notes, and direct bidders buying 12.6 percent, the least since July.
Indirect bidders have averaged winning 24.7 percent for the past 10 sales while direct bidders have won an average 24.5 percent of the last 10 offerings. Primary dealers were awarded
65.5 percent of the offering.
“They got more than they expected, and that’s usually a bad sign for price action following the auction,” Kohli said.
Two-year notes have gained 0.1 percent this year, compared with a decline of 0.5 percent by Treasuries overall, according to Bank of America Merrill Lynch indexes. The two-year securities returned 0.3 percent in 2012, while Treasuries overall rose 2.2 percent.
Today’s offering is the first of three note auctions this week totaling $99 billion. The government will sell $35 billion in five-year debt tomorrow and $29 billion in seven-year securities on May 30.
The sales, including the Treasury Inflation Protected Securities offering last week, will raise $53.54 billion of new cash, as maturing securities held by the public total $58.46 billion, according to the U.S. Treasury.
“There’s a fear there’s going to be a convexity-related event and some of this is selling beforehand,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, a primary dealer.
Any convexity selling will be muted because of changes in the composition of the mortgage market since the depths of the financial crisis in 2008, Jersey said. The Fed now holds $1.17 trillion of mortgage-backed debt, which it doesn’t hedge, and the portfolios of Fannie Mae and Freddie Mac have shrunk, limiting their need to minimize a rise in the interest-rate risk of mortgages by selling Treasuries, Jersey said.
Should the 10-year Treasury yield close above 2.086 percent, the high for 2013, it would signal further increases, said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut.
“We get back over that and we have to talk about the highs of last year,” Ader said.
The 10-year yield peaked in 2012 at 2.40 percent on March
20. From there it fell to a record low of 1.379 percent on July 25 as the European sovereign-debt crisis continued to worsen.
The Fed is buying $85 billion of Treasury and mortgage debt a month, a policy known as quantitative easing, to support the economy by putting downward pressure on borrowing costs. The central bank acquired $1.45 billion of Treasuries maturing from February 2036 to May 2043 today.
“If we see continued improvement and we have confidence that that is going to be sustained, then we could in -- in the next few meetings -- we could take a step down in our pace of purchases,” Bernanke told lawmakers last week. “Again, if we do that, it would not mean that we are automatically aiming toward -- toward a complete winddown. Rather, we would be looking to beyond that to see how the economy evolves, and we could either raise or lower our pace of purchases going forward.”
The Conference Board’s confidence index rose to 76.2, the strongest since February 2008 and exceeding the highest estimate in a Bloomberg survey of economists, from a revised 69 in April, data from the New York-based private research group showed today. The median forecast called for an increase to 71.2.
The S&P/Case-Shiller index of property values increased
10.9 percent from March 2012, the biggest 12-month gain since April 2006, after advancing 9.4 percent in February, a report showed today in New York. The median projection of 30 economists surveyed by Bloomberg called for a 10.2 percent advance.
“The fact that we broke through 2.085 percent level, which was the high for the year, that brought in a lot of stop-outs and fast-money selling for technical reasons as we pushed through that,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors, referring to the 10-year yield.
Unemployment at 7.5 percent and a 1.1 percent inflation rate are helping keep yields and volatility in check.
Treasury Inflation-Protected Securities show investors anticipate an average increase of 2.28 percent in consumer prices for the next decade, up from 2.23 percent on May 23, which was the least since Aug. 9.
The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, fell in April for a second month by 0.2 percent, according to the median forecast of 32 economists in a Bloomberg News survey. The Bureau of Economic Analysis will report the data May 31.