Treasury 30-Year Bonds Rise on Demand Speculation Before Auction

Treasury 30-year bonds rose as the U.S. prepared to sell $16 billion of the debt at yields close to the highest level at an auction of the maturity in two years.

The yield on the benchmark 10-year note touched the lowest level this month after U.S. sold $24 billion of the securities yesterday and $32 billion in three-year notes the previous day, drawing above-average demand from foreign investors. Bond managers must adapt to a “new world” of near zero-round interest rates and the likelihood of lower total returns, Pacific Investment Management Co.’s Bill Gross wrote in his monthly investment outlook.

“Given the indirect participation at the three-year and 10-year auctions, people are optimistic bonds will benefit from elevated non-dealer bidding,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The yield on 30-year bonds fell three basis points, or 0.03 percentage point, to 3.65 percent at 12:11 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.875 percent security due May 2043 added 17/32, or $5.31 per $1,000 face amount, to 85 31/32.

The benchmark 10-year note yield fell two basis points to 2.58 percent, after touching the lowest level since July 31.

Bond Pattern

The 30-year bonds being sold today yielded 3.63 percent in pre-auction trading, compared with 3.66 percent at a previous auction of similar-maturity debt on July 11. That was the highest in almost two years.

Investors in U.S. government securities have lost 2.6 percent this year, according to the Bloomberg U.S. Treasury Bond Index as of yesterday. U.S. debt gained 2 percent in 2012. The 30-year bond lost investors 11.9 percent this year, according to Bank of America Merrill Lynch Indexes.

Reducing maturity isn’t the only potential strategy to win this new war, Gross wrote in his outlook, adding that investors should focus on “carry,” a strategy that involves capitalizing on yield-curve differences, volatility, credit spreads, maturity extension and currency variations.

Another investor concluded that investors should sell bonds as the 30-year bull-run in fixed-income securities is drawing to an end.

“We believe that this is a generational selling opportunity for investors in the 20-year Treasury and other long duration bonds,” James O’Shaughnessy, chief executive officer of O’Shaughnessy Asset Management in Stamford, Connecticut, wrote in a note to clients. “In my lifetime, I will never again see returns to the long bond as high as those achieved for the 10-, 20-, and 40- years through March 2009.”

Investors should reduce bond maturity durations before it is too late, he added.

Asset Allocation

Institutional investors’ allocations to dollar-denominated bonds have dropped to the lowest level since 2007 as strategists at Morgan Stanley and JPMorgan Chase & Co. see a shift away from the debt that may fuel higher borrowing costs.

Holdings by investors from pensions to endowments fell to 26.2 percent of assets in the second quarter, from 30.1 percent in the corresponding period of 2012, according to the Wilshire Trust Universe Comparison Service, which tracks plans that oversee $3.46 trillion. Morgan Stanley’s $1.8 trillion wealth management unit has been advising clients to cut bond allocations to the lowest in more than five years, Chief Investment Strategist David Darst said.

The yield on 10-year Treasuries reached 2.75 percent on July 8 from a low this year of 1.61 percent on May 1, triggered by Federal Reserve Chairman Ben S. Bernanke, who rattled markets in May and June by outlining a plan to end the central bank’s unprecedented asset purchases.

The Fed is buying $85 billion of Treasuries and mortgage debt each month to put downward pressure on interest rates. It purchased $3.22 billion of Treasuries maturing from August 2020 to November 2022 today. Policy makers are discussing whether the economy has improved enough for them to start reducing the purchases.

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