U.S. Bonds Rally on Overseas Demand at Auctions Amid Fed Views

Treasury 30-year bonds rose for the first time in three weeks as U.S. auctions of $72 billion of securities including long bonds at two-year-high yields attracted above-average demand from foreign investors.

Benchmark 10-year yields traded within the narrowest weekly range since April amid speculation about whether the Federal Reserve may start to reduce bond purchases in September. The central bank has been purchasing $85 billion in Treasuries and mortgages each month in a program known as quantitative easing to put downward pressure on interest rates. A report next week is forecast to show consumer prices increased 0.2 percent in July, according to economists surveyed by Bloomberg.

“The week’s auctions were very strong and there has been more reluctance for investors to extend into riskier markets, which also supports Treasuries,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “The yield rise has been arrested to some degree, as the possibility of Fed tapering is now largely priced in.”

The yield on 30-year bonds fell five basis points this week, or 0.05 percentage point, to 3.63 percent in New York, according to Bloomberg Bond Trader prices. The 3.625 percent security due August 2043 traded at 99 26/32.

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

Bond Returns

Investors in U.S. government securities have lost 2.5 percent this year, according to the Bloomberg U.S. Treasury Bond Index. U.S. debt gained 2 percent in 2012.

Hedge-fund managers and other large speculators reversed to a net-short position in 10-year note futures in the week ending Aug. 6, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 20,096 contracts on the Chicago Board of Trade. Last week, traders were net-long 11,903 contracts.

The 30-year bonds sold on Aug. 8 drew a yield of 3.652 percent. That compared with 3.66 percent at a previous auction of similar-maturity debt on July 11, which was the highest in almost two years.

Indirect bidders, an investor class that includes foreign central banks, purchased 40.2 percent of the bonds, compared with an average of 37.2 percent for the past 10 sales. Primary dealers purchased 42.7 percent, below the 48.5 percent average of the past 10 auctions.

Auction Update

At the Aug. 7 sale of 10-year notes, indirect bidders purchased 46.3 percent of the debt, compared with an average of 37.1 percent for the past 10 sales. At an auction of three-year securities the previous day, indirect bidders bought 41.4 percent of the notes, the most since August 2011 and above the average of 26.1 percent at the past 10 sales.

Demand comes amid data indicating foreign investors were adding Treasuries at the slowest pace since 2006 as holdings by non-U.S. investors rose 1.9 percent through May, down from 5.2 percent a year ago, data released in July by the Treasury showed.

Fed officials “said ’if economic data allows,’ so in the back of people’s minds, there still is a chance they may not taper in September,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “It’s why the auctions went pretty well.”

Reduced Demand

Investors bid $2.90 for each dollar of the $1.329 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 75.40 yesterday. It touched 117.89 on July 5, the highest level since December 2010. The average for 2013 is 67.34.

The benchmark 10-year yield climbed to a two-year high of 2.75 percent on July 8 from a low this year of 1.61 percent on May 1. Fed Chairman Ben S. Bernanke rattled markets in May and June by outlining a plan to end the central bank’s stimulus program of asset purchases.

“You’re waiting for some type of information to give you an inkling into the time frame that the Fed’s looking at,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “They were looking for affirmation that the Fed would be tapering in September. We need a new catalyst from here to generate some movement.”

Fed officials indicated greater willingness this week to begin tapering stimulus.

“I would clearly not rule” out a decision to start dialing back the purchases at the Sept. 17-18 gathering of the Federal Open Market Committee, Chicago Fed President Charles Evans said on Aug. 6. “We’ve seen good improvement in the labor market, there’s no question in my mind about that.”

Benchmark 10-year yields will end the year at 2.74 percent, according to the median of a Bloomberg News survey of analysts.

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