Treasuries Erase Drop Before Sale of $30 Billion in 3-Year Notes

Treasuries erased a drop before the U.S. auctions $30 billion of three-year securities, the first of three sales of notes and bonds this week.

Benchmark 10-year note yields fell from to almost the highest level since January as stocks erased gains and commodities dropped, boosting demand for safety. Yields rose earlier as U.S. wholesale inventories widened in January, adding to signs the economy continued to progress amid stormy weather. Retail sales may have risen in February after falling unexpectedly the prior month, according to a Bloomberg survey before the March 13 data.

Treasury demand rose on “a further deterioration in the commodities market and risk-on assets in general,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It has less to do with the three-year note auction or the broader supply and demand dynamics in the Treasury market, but rather a classic flight-to-quality dynamic on some concerning headlines from other parts of the world.”

U.S. 10-year yields were little changed at 2.77 percent as of 12:36 p.m. in New York after touching 2.80 percent, according to Bloomberg Bond Trader data. Yields reached 2.82 percent on March 7, the highest level since Jan. 23. The 2.75 percent security due February 2024 rose 1/32, or 31 cents per $1,000 face amount, to 99 25/32.

Volatility in U.S. debt measured by the Bank of America Merrill Lynch MOVE Index fell to 55.68 yesterday, the lowest level since May 10.

In addition to the three-year notes, the Treasury is scheduled to sell $21 billion in 10-year debt tomorrow and $13 billion in 30-year bonds the next day.

‘Continue Tapering’

The better-than-forecast jobs report last week bolstered speculation the Federal Reserve will continue to trim the monthly bond purchases it makes under the quantitative-easing stimulus strategy, designed to support the economy and keep borrowing costs low.

“There’s a little optimism with respect to people’s expectations for the economy,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “Supply is a factor here, as well.”

The median of 74 economists’ and analysts’ predictions compiled by Bloomberg is for the 10-year yield to reach 3.20 percent in the third quarter.

Treasuries fell 0.6 percent in the month, based on the Bloomberg U.S. Treasury Bond Index. The 10-year note traded in the narrowest range in February since April 2007.

Winter Weather

Winter weather in the U.S. has slowed housing, consumption and employment, with job gains in December and January falling short of the levels projected by economists in Bloomberg News surveys.

U.S. employers added 175,000 positions in February, beating the projection of 149,000 among economists, based on Labor Department figures March 7.

Retail sales in February likely rose 0.2 percent after unexpectedly falling 0.4 percent the month before, according to the median forecast of 84 economists in a Bloomberg News survey. The Commerce Department will release the data March 13 in Washington, D.C.

U.S. wholesale inventories rose 0.6 percent in January, the Census Bureau said today, versus estimated growth 0.4 percent by 28 economists on a Bloomberg survey. The rose a revised 0.4 percent the previous month.

The three-year notes scheduled for sale today yielded 0.81 percent in pre-sale trading. The yield hasn’t been so high at the monthly auctions since September.

Auction Bidding

“I don’t suspect the supply is going to be a problem,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “That the 10-year is trading at 2.78 percent instead of 2.90 percent suggests that this recent infatuation with positive data from the jobs report has not fully convinced the bond market that it’s full speed ahead.”

At the last offering Feb. 11, investors placed bids for 3.42 times the amount of debt available. The average for the past 10 sales including last month’s is 3.29.

Indirect bidders, the investor class that includes central banks outside the U.S., purchased 42 percent of the securities. It was the most since August 2011.

Fed Chair Janet Yellen said last month the central bank will probably maintain its strategy of trimming the debt-buying program it uses to support the economy.

ETF Flows

Policy makers have reduced the monthly debt purchases by $10 billion a month in January and February, to $65 billion. The Fed’s next policy meeting is March 18-19.

Investors withdrew $11.9 million from exchange-traded funds of U.S. fixed-income securities on March 10, compared with the 20-day average of inflows of $610 million, according to ETF data compiled by Bloomberg.

Investors have favored ETFs U.S. stocks, which took in $3 billion on March 10, more than the 20-day average of $2.1 billion, Bloomberg data show.

U.S. fixed-income ETFs have taken in $9 billion so far this year, compared with $938.7 million in outflows from domestic equity funds, Bloomberg data show.

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