Treasuries at Week Low Versus G-7 Peers Before Sale

Treasuries held a three-day decline, putting 10-year yields at the highest in a week, before the U.S. government auctions $24 billion of 2024 securities today.

The 10-year notes dropped to the cheapest level in a week against their Group-of-Seven peers before a report economists said will show retail sales increased for a sixth month in July, adding to signs the world’s largest economy is gaining momentum. The U.S. securities have advanced this month as fighting in Ukraine, Iraq and Gaza boosted demand for safer assets.

“We have had a habit of rallying into 10-year auctions, so I would look for a day trade to get long ahead of the retail sales report,” said Barra Sheridan, a rates trader at Bank of Montreal in London. Retail sales data “is a big print today. If Treasuries can cheapen up a little more, then maybe buy the dip.”

A long position is a bet the asset will appreciate.

The U.S. 10-year yield was little changed at 2.46 percent as of 7:38 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due in May 2024 was 100 3/8. Earlier the yield rose as much as 2 basis points, or 0.02 percentage point, to 2.47 percent, the highest since Aug. 7.

Ten-year yields may rise to as high as 2.50 percent today, Sheridan said.

Weaker Demand

The extra yield benchmark notes offer over their G-7 counterparts was 73 basis points, the most since Aug. 4, compared with as little as 37 basis points in February, when it was the least so far in 2014.

The previous 10-year auction on July 9 drew a yield of 2.597 percent, the lowest since June 2013 at the monthly sales. Investors submitted bids for 2.57 times the amount available, down from 2.88 times the previous month.

Indirect bidders, a class of investors that includes foreign central banks, bought 39.6 percent of the notes last month, up from 36.1 percent in June. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 13.9 percent, compared with 19.4 percent.

“Auction performance has weakened at the 10-year sector,” Anshul Pradhan and Vivek Shukla, strategists at Barclays Plc in New York, wrote in an e-mailed note dated yesterday. “Lower demand from foreign and domestic fund investors has likely contributed to the recent performance,” they wrote, adding that “we expect the sector to cheapen going into the auction.”

Geopolitical Concerns

Yesterday’s auction of $27 billion of three-year notes drew the lowest yield since April as speculation turmoil in Ukraine and Iraq will worsen fueled investor demand for safety. The sale drew bids for 3.03 times the amount offered, versus an average of 3.35 at the past 10 sales. The Treasury is scheduled to sell $16 billion of 30-year bonds tomorrow.

Demand for Treasuries has been tempered by concern the Federal Reserve will raise interest rates next year as the economy improves. There’s about a 69 percent chance the central bank will increase its benchmark rate to at least 0.5 percent by September 2015, futures trading shows. The target has been kept in a range of zero to 0.25 percent since 2008.

“After the flight to quality, we decided to cut some of our positions,” said Hajime Nagata, a money manager in Tokyo at Diam Co., which oversees the equivalent of $138 billion. “Treasuries are relatively expensive. The market is not expecting good auctions. Unless we have more geopolitical news, the auctions will not be good.”

Diam sold five- and 10-year Treasuries last week when the 2024 yield fell below 2.40 percent, Nagata said.

Retail sales rose 0.2 percent in July, matching the previous month’s gain, according to a Bloomberg News survey before today’s report. U.S. job openings increased to 4.67 million in June, the most since February 2001, the Labor Department said yesterday.

The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased to $265 billion yesterday, from $195 billion a day earlier. The average daily volume this year is $327 billion.

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