Treasuries Fluctuate Before 7-Year Auction as Yield Gap Narrows

Treasuries were little changed, with the difference between yields for Treasury seven- and 30-year debt at the narrowest since 2009, as the U.S. prepared to sell $29 billion of the shorter-term securities.

U.S debt strengthened on reports that Russian President Vladimir Putin warned Ukraine against continuing its anti-separatist offensive, fueling refuge demand. Treasuries had fallen earlier following a report from the Commerce Department that durable-goods orders climbed in March more than forecast, adding to evidence the economy is strengthening.

“We should be backing up yields in anticipation of the seven-year auction,” said Thomas di Galoma, head of fixed income rates at ED&F Man Capital Markets in New York. “Putin’s really the reason” for flight-to-safety demand because “he’s got the market a little bit spooked.”

The benchmark 10-year note yield was little changed at 2.70 percent at 11:52 a.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.75 percent note maturing in February 2024 fell 1/32, or 31 cents per $1,000 face amount, to 100 3/8. The yield rose as much as three basis points.

The seven-year yield was at 2.29 percent, while that on 30-year bonds was 3.49 percent. The spread between seven- and 30-year debt shrank to as little as 1.18 percentage points, the least since October 2009.

Seven-year securities returned 2.1 percent this year through yesterday, while long bonds earned 10.2 percent, Bank of America Merrill Lynch indexes show.

Yield Differences

“In the past couple of months the very long end of the U.S. curve has performed very well,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Shorter yields are pretty fair in terms of the data we’ve seen. The market had been pricing in a very soft Fed, but that’s being re-priced.”

Futures prices put the likelihood the Fed will start raising borrowing costs in July 2015 at 69 percent yesterday, compared with 47 percent for June 2015, based on trading on the CME Group Inc.’s exchange.

The seven-year note to be sold today yielded 2.31 percent in pre-auction trading. Investors at the previous auction on March 27 submitted bids for 2.59 times the amount of debt available, down from 2.72 times in February.

The Treasury said it will auction $15 billion in two-year floating rate notes April 29. That was the size of the initial offering of the securities in January and an increase of $2 billion compared with the previous two offerings.

Demand for the securities has drawn bids totaling 5.23 times the $41 billion of the debt sold at the three sales, according to Treasury data compiled by Bloomberg.

Putin Stance

Russian President Vladimir Putin warned Ukraine against continuing its anti-separatist offensive after government troops killed five rebels and prompted Russia’s military to begin drills on the two nations’ border.

Amid rising concern about conflict in Ukraine, one-month Treasury bill rates reached negative 0.005 percent today for the first time since Feb. 13.

Orders for goods meant to last at least three years increased 2.6 percent, the biggest gain since November, after rising 2.1 percent in the prior month, a Commerce Department report showed. The median forecast of economists surveyed by Bloomberg called for a 2 percent advance.

Treasuries rose yesterday as a weaker-than-forecast housing report and the conflict between Russia and Ukraine spurred investors to seek a haven in government securities.

Price Risk

“This amounts to is an idiosyncratic risk that’s very hard to hedge for,” said James Caron, who manages money in New York at Morgan Stanley Investment Management, which oversees $61 billion of fixed-income assets.

With the next Fed policy statement scheduled for April 30 and nonfarm payrolls data for the month coming May 2 “the market is stuck very much in a wait-and-see mode,” Caron said. “Between now and then the data points that come out are going to be very noisy with respect to the bigger events that are coming.”

The Commerce Department said new home sales dropped 14.5 percent in March to a 384,000 annualized pace, lower than any forecast of economists surveyed by Bloomberg News and the weakest reading since July.

Fed policy makers are winding down the bond-purchase program they have used to support the economy. They have kept their target for overnight lending between banks in a range of zero to 0.25 percent since December 2008.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, was 2.23 percentage points, the highest level since March 10. The average during the past decade is 2.21.

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