Treasury 10-Year Yields at Almost 14-Month High Before Auction

Treasury 10-year note yields traded at an almost 14-month high as the U.S. prepared to auction $21 billion of the securities amid concern the Federal Reserve will slow purchases of U.S. government debt.

The Bloomberg U.S. Treasury Bond 10+ Year Index has fallen 4.2 percent in 2013 on bets the economy is growing fast enough for the Fed to reduce monetary stimulus. Pre-auction yields on the notes being sold today reached what would be the highest level since October 2011. A three-year debt sale yesterday drew the lowest bidding since 2010, while the U.S. will sell $13 billion of 30-year bonds tomorrow.

“The question is, has the market gone down far enough and stabilized a bit here so that we bring in buyers for the 10s and bonds?” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “There have been buyers all year with lower yield levels, so will they buy at these higher yields? I’m looking for slightly higher yields between now and the auction today.”

The benchmark 10-year yield was little changed at 2.19 percent at 11:43 a.m. New York time after climbing to 2.29 percent yesterday, the highest level since April 2012, according to Bloomberg Bond Trader data. The 1.75 percent note maturing in May 2023 traded at 96 1/8.

The securities being auctioned today traded at a yield of 2.20 percent before the offering.

At the last sale of the maturity, on May 8, investors bid for 2.70 times the amount available, versus 2.79 in April.

‘Tentative Nature’

Ten-year notes fell for the past six weeks, the longest losing stretch since 2009, amid speculation the Fed will taper its bond buying.

“The last month is going to be fresh in people’s minds,” said John Briggs, a U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, one of 21 primary dealers that are required to bid at Treasury auctions. “I wouldn’t be surprised to see a little bit of a tentative nature for investors in the next two auctions.”

Ten-year notes drew a 1.81 percent yield at the May sale.

A shortage of 10-year notes in the government debt funding market has traders willing to pay to borrow the securities in exchange for loaning cash for the most actively traded maturity.

The overnight repurchase agreement, or repo rate, for the 1.75 percent note due in May 2023 closed at negative 2.9 percent today, according to data from ICAP Plc, the world’s largest inter-dealer broker.

‘In Demand’

“On the margin, that should be a positive for the auction because it shows the securities are in demand,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The U.S. sold $32 billion of three-year notes yesterday at a yield of 0.581 percent. A Bloomberg News survey of traders before the auction projected 0.575 percent. The amount of bids relative to debt sold, a gauge of demand known as the bid-to-cover ratio, was 2.95, the least since December 2010.

Demand for Treasuries at auction has slackened this year amid signs of improvement with the U.S. economy. Investors have bid $2.98 for each dollar of debt sold at the U.S. government’s $937 billion in Treasury notes and bonds sold at auction, compared with a record bid-to-cover ratio of $3.15 set in 2012, according to Treasury data compiled by Bloomberg.

Pimco’s ‘Buy’

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., called intermediate Treasuries a “buy.”

The “Fed’s not raising interest rates for years,” Gross said today in a Twitter posting. “That makes intermediate Treasuries at buy at 2.0 percent plus.” The central bank has held its key rate at virtually zero since 2008 to support the economy and has said it won’t be raised until there’s substantial growth.

Gross reduced the proportion of U.S. government securities in his $285.2 billion Total Return Fund to 37 percent, from 39 percent the previous month, according to data on Newport Beach, California-based Pimco’s website yesterday.

The Fed, which meets next June 18-19, is buying $85 billion of Treasuries and mortgage-backed securities each month to put downward pressure on borrowing costs. It will reduce the purchases to $65 billion a month at its Oct. 29-30 meeting, economists in a Bloomberg survey forecast last week.

The central bank bought $916 million of Treasuries today due from August 2023 to February 2031, from $4.2 billion offered by dealers.

Volatility, Volume

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE Index was at 82.3 yesterday, after rising to 84.75 on June 6 and June 10, the highest level in almost a year. It has averaged 62.4 over the past 12 months.

Trading volume has been increasing, with the amount changing hands through ICAP Plc, the largest inter-dealer broker of U.S. government debt, averaging $397 billion a day since the start of May. That’s up from an average of $280.6 billion in the first four months of the year.

U.S. securities lost 1.2 percent this year through yesterday, according to the Bloomberg U.S. Treasury Bond Index. German bunds declined 1.2 percent and U.K. gilts dropped 2 percent, separate indexes show.

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