Treasury Yields Climb From 2-Month Low Before $64 Billion Sales

Treasuries declined, with 10-year yields climbing from a two-month low, before the U.S. auctions $64 billion of debt, the first time it will conduct two fixed-coupon debt sales in a single day since October 2008.

U.S. debt extended losses after a report showed the economy expanded at a 3.2 percent pace in the fourth quarter as Americans’ spending climbed the most in three years, laying the ground for further improvement in 2014. Treasury notes snapped an advance from yesterday, when a slide in emerging-market assets boosted demand for the safest fixed-income securities and the Federal Open Market Committee reduced monthly bond purchases to $65 billion from $75 billion.

“Supply will dominate the theme,” said Sean Murphy, a trader at Societe Generale SA in New York, one of 21 primary dealers that trade with the Federal Reserve. “The main focus will be the $64 billion in supply.”

The benchmark 10-year yield rose three basis points, or 0.03 percentage point, to 2.71 percent at 10:19 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.75 percent note due November 2023 slipped 9/32, or $2.81 per $1,000 face amount, to 100 11/32.

The yield dropped seven basis points yesterday, and touched 2.66 percent, the least since Nov. 19.

Trading Pace

Treasury trading volume at ICAP, the largest interdealer broker of U.S. government debt, rose to $494 billion yesterday, the highest level since June 24.

The Fed said yesterday it will stick to its plan for a gradual withdrawal from departing Chairman Ben S. Bernanke’s unprecedented easing policy. It has undertaken three rounds of bond buying since 2008 under the quantitative-easing stimulus strategy, swelling its balance sheet to a record $4.1 trillion.

The Fed had been forecast to continue reducing purchases by $10 billion at the meeting yesterday and each one following to end the stimulus program this year, according to analysts in a Jan. 10 Bloomberg News survey.

The Treasury will auction $35 billion of five-year notes and $29 billion of seven-year securities today.

“The street’s got to set up a little bit for it,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The combination of supply coming together and the Fed” tapering have increased the potential for higher yields, Milstein said.

Auction Preview

The shorter-maturity debt to be sold yielded 1.56 percent in pre-auction trading, down from 1.6 percent at the prior offering on Dec. 18. The rate on the longer-term notes was 2.19 percent, compared with 2.39 percent at a previous sale on Dec. 19.

Investors bid for 2.42 times the amount of five-year Treasury notes available last month, lower than the average of 2.65 for the prior 10 auctions. The bid-to-cover ratio for seven-year notes was 2.45, versus the 10-sale average of 2.57.

U.S. 10-year yields will rise to 3.42 percent by the year-end, economists forecast. Investors who bought the securities today would lose about 3 percent during the period, according to data compiled by Bloomberg.

The economy’s fourth quarter expansion matched forecasts in a Bloomberg survey of economists before the Commerce Department releases the figure today. Gross domestic product expanded 4.1 percent in the third quarter, the most in almost two years.

Economic Reading

Pending sales of existing homes in the U.S. fell 8.7 percent in December, more than forecast, as higher borrowing costs and bad weather held back sales, the National Association of Realtors said in Washington. The decline was the biggest since May 2010, after a revised 0.3 percent drop in November that was initially reported as a gain. The median projection in a Bloomberg survey of economists called for the index to drop 0.3 percent.

Demand for Treasuries was supported amid a selloff of emerging-market currencies and as data signaled China’s manufacturing is decelerating.

HSBC Holdings Plc and Markit Economics said their purchasing managers’ index for China was at 49.5 in January, compared with the previously reported 49.6 on Jan. 23 and 50.5 for December.

Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record. More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show.

“Fixed-income assets have profited from risk-off sentiment,” said Piet Lammens, head of research at KBC Bank NV in Brussels. While the emerging-market turmoil “keeps a lid” on rates in the short-term, “the underlying trend should be towards higher yields,” he said.

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