Treasuries Drop After U.S Auction of 30-Year TIPS

Treasury 30-year bonds fell the most in three months after an auction of inflation-protected securities drew a higher-than-forecast yield.

Five-year notes dropped from the loftiest level in a week on speculation the debt rallied too far, too fast after the Federal Reserve trimmed U.S. economic growth estimates. Global bonds gained. The government sold $7 billion of 30-year Treasury Inflation Protected Securities at a yield of 1.116 percent, versus the average forecast of 1.093 percent by seven of the Federal Reserve’s 22 primary dealers.

“It’s the inflation story -- clearly people are becoming more concerned about it and the Fed seemed to discount it,” Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The Fed came out yesterday and said they’re going to stay at these low levels, probably longer than people had anticipating, after we got the recent inflation prints.”

Thirty-year bond yields gained seven basis points, or 0.07 percentage point, to 3.47 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They earlier rose nine basis points, the most since March 4. The 3.375 percent security maturing in May 2044 fell 1 7/32, or $12.19 per $1,000 face value, to 98 10/32.

Yields on five-year notes were little changed at 1.68 percent. The yield rose as high as 1.71 percent after dropping to 1.64 percent, the least since June 12. It plunged eight basis points yesterday. Ten-year note yields rose three basis points to 2.62 percent after declining seven basis points yesterday.

TIPS Auction

The 30-year TIPS auction’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.76, versus an average of 2.66 at the past 10 auctions.

Indirect bidders, a category of investors that includes foreign central banks, bought 59.7, compared with the average of 46.3 percent at the past 10 auctions.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.2 percent, versus a 15 percent average at the past 10 offerings.

The Fed’s primary dealers were left with 32.1 percent, the least since February 2013.

Inflation-indexed notes pay interest at lower rates than nominal Treasuries on a principal amount that’s linked to the Labor Department’s consumer price index.

Fed Trade

Treasuries rose earlier as an index of U.S. leading indicators increased in May for the fourth straight month, fewer Americans filed applications for unemployment insurance payments last week and consumer confidence improved.

“The data was pretty good,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “As the long bond is leading the market lower, it’s more of a give-back from the overnight carry-through of the Fed trade.”

The Bloomberg U.S. Treasury Bond Index rose 0.3 percent yesterday as the Fed reduced its long-term estimates for growth and its target interest rate, while also cutting monthly debt purchases by $10 billion.

European government bonds advanced after after Federal Reserve Chair Janet Yellen and policy makers yesterday reduced long-term estimates for interest rates, while cutting monthly debt purchases by $10 billion. That added to bets interest rates around the world will stay lower for longer after the European Central Bank cut interest rates to a record this month.

Australia’s 10-year yield fell to the lowest this month, while Spanish 10-year rates dropped by the most in two weeks.

‘Suppressing’ Rates

“Key global central banks will remain committed to suppressing interest rates,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “You can attribute the moves in Europe along the periphery and among developed countries to Yellen’s interesting views on the recent path of inflation, which she chalked up more or less to noise, and disregarded the fairly significant recent increases in prices. She may well be right.”

The Federal Open Market Committee repeated yesterday it’s likely to “reduce the pace of asset purchases in further measured steps” and it expects interest rates to stay low for a “considerable time” after bond-buying ends. The central bank left its target for overnight lending between banks in the range of zero to 0.25 percent, where it has been since 2008.

Updating their economic forecasts, Fed officials predicted their target interest rate will be 1.13 percent at the end of 2015 and 2.5 percent a year later, higher than previously forecast. They lowered their long-run estimated rate to 3.75 percent from 4 percent. Policy makers forecast long-term growth for the economy at 2.1 percent to 2.3 percent, versus 2.2 percent to 2.3 percent in March.

The difference between yields on five-year TIPS and conventional Treasuries rose for a fourth day, adding two basis points to 2.07 percentage points, the widest since May 2013.

Before it's here, it's on the Bloomberg Terminal.