Treasury Yields at Almost 3-Week Low as Existing-Home Sales Drop

Treasury 10-year note yields traded at an almost three-week low as an unexpected drop in existing-home sales in June boosted bets the Federal Reserve will maintain monetary stimulus to support the economy.

Two-year notes yielded 0.302 percent before tomorrow’s $35 billion sale of the debt, compared with an auction yield of

0.430 percent at the previous offering in June. The U.S. is also selling five- and seven-year notes this week. Ten-year yields had climbed to the highest since August 2011 this month after Fed Chairman Ben S. Bernanke said in June the central bank could reduce asset purchases this year if policy makers saw a sustainable economic recovery.

“Housing is one of the data points that isn’t following the Fed’s script,” Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the Fed. “There really isn’t a lot of conviction going into month-end in terms of things like what the Fed is going to do.”

The U.S. 10-year yield was little changed at 2.48 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2023 traded at 93 21/32.

The yield dropped earlier to 2.46 percent, almost the lowest level since July 3. It fell 26 basis points during the past two weeks, the most since the 10-day period ended Aug. 31.

The 30-year yield declined one basis point to 3.55 percent after touching 3.53 percent, the least since July 5.

Volume, Volatility

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was $192.8 billion, versus $364 billion on July 17, the highest level since July 5. The 2013 average is $318.2 billion.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was at 72.62, the lowest level since May 24. The figure is down from 117.89 on July 5, the highest since December 2010. The one-year average is 64.7.

Purchases of existing homes fell 1.2 percent to a 5.08 million annualized rate, the National Association of Realtors reported today in Washington. The median forecast of 79 economists surveyed by Bloomberg called for a 5.26 million pace. The pace of the demand was the second strongest since November 2009 following May’s downwardly revised 5.14 million rate.

“It’s existing-home-sales data that are coming in lower than expected -- last week we had permits and starts coming coming in very weak also,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “With the recent numbers, which have been a bit weak, the belief is the Fed is not going to be tapering in September. That’s been supporting the Treasury market.”

Notes Auctions

Demand weakened at the previous two offerings of two-year notes. The bid-to-cover ratios, which gauge demand by comparing the amount bid with the amount offered, at the May and June auctions were 3.04 and 3.05, the two lowest since February 2011 and compared with a 3.54 average at the 10 previous auctions, Treasury data show.

Direct bidders, investors and dealers outside of the primary-dealer network bidding directly to the Treasury, won 7.8 percent of the June offering and 12.6 percent of the May sale, the two smallest awards since July 2012. The average at the past 10 sales was 23.9 percent.

The Treasury Department will auction $35 billion of five-year notes on July 24 and $29 billion of seven-year securities the next day.

Looking Long

“There are three bond buybacks, and at the last bond auction dealers didn’t buy any bonds,” Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “Guys are looking at the long end of the market to outperform this week.”

The Fed buys $85 billion of Treasuries and mortgage debt each month as part of its quantitative-easing program to cap borrowing costs. Policy makers have held the benchmark interest-rate target at zero to 0.25 percent since 2008 to support the economy. The central bank will purchase as much as $1.75 billion of Treasuries maturing between February 2036 and May 2043 today.

Tighter financial conditions as a result of rising yields over the past two months were “unwelcome,” Bernanke said in response to a question from the Senate Banking Committee in Washington on July 18.

Trimming Odds

Investors see a 60 percent chance that policy makers will keep the federal funds rate at 0.25 percent or lower by December 2014, according to data compiled by Bloomberg.

The 10-year yield climbed 81 basis points from the close on May 21, the day before Bernanke said the Fed could trim stimulus in its “next few meetings,” to the close on July 5 after a report that day showed U.S. employers added more jobs in June than economists forecast.

Foreign investors, the bulwark of the U.S. government bond market as it more than doubled in size during the financial crisis, are adding Treasuries at the slowest pace since 2006 amid the worst rout in four years.

Holdings by non-U.S. investors rose 1.9 percent through May, down from 5.2 percent a year ago, data last week showed, as foreigners owned less than 50 percent of Treasuries outstanding for the first time since March 2012. Overseas central banks cut the amount of bonds held for them by the Fed during the second quarter. The Bloomberg U.S. Treasury Bond Index fell 2.4 percent, the most since 2009, after Bernanke said he might slow asset purchases as the economy improves.

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