Treasuries Post First Loss in Six Weeks Before Fed, Auctions

Treasuries posted a loss for the first time in in six weeks before the Federal Reserve holds a meeting next week where policy makers are forecast to end monthly bond-buying.

U.S. debt rallied earlier today as higher relative yields to Group of Seven counterparts lured investors amid concern a New York Ebola case reflects further spreading of the virus that may weigh on the global economy. Benchmark 10-year notes yielded 0.70 percentage point more than G-7 peers, stoking demand for the debt. The Treasury will auction $93 billion of coupon-bearing debt next week.

“We’ve got some coming supply and a potentially hawkish Fed next week,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 22 primary dealers that trade with the Fed. “There is not a lot of intense conviction in trading today. A lot of what we are seeing is the afterthoughts of the Ebola we heard about yesterday.”

The benchmark 10-year yield was little changed at 2.27 percent as of 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.375 percent note due in August 2024 traded at 100 29/32. The yield added eight basis points this week, the first increase since the five days ended Sept. 12.

Relative Yields

Ten-year notes yielded 92 basis points more than G-7 peers on Sept. 17, the widest since June 2007. The gap has narrowed as Treasuries rallied by the most since January. The U.S. benchmark notes yield more than the debt of 18 developed nations, exceeding the United Kingdom at 2.23 percent and less than Italy’s 2.51 percent.

Treasuries “are the least expensive of the sovereign bonds right now,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. The 10-year “will end the year in a range of 2.35 to 2.5 percent.”

Treasury trading volume at ICAP Plc, the largest interdealer broker of U.S. government debt, was $286 billion, down from $363 billion yesterday. It reached a record $946 billion on Oct. 15.

U.S. GDP growth slowed to 3 percent in the third quarter from 4.6 percent in the previous three months, according to a Bloomberg News survey of economists before the Commerce Department releases the figures on Oct. 30.

Fed Policy

The Fed said last month it will end its bond-purchase program at its Oct. 28-29 meeting as long as the U.S. economy keeps improving.

The Fed has held its short-term interest-rate target at zero to 0.25 percent since December 2008. The Fed has expanded its balance sheet assets to $4.5 trillion from less than $1 trillion in 2008 in an effort to stimulate growth after the global financial crisis.

“The bias is generally for higher yields because of the end of the Fed’s QE and because data and earning that shows the economy continues to move forward,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “That will continue to lean toward a higher-rate environment.”

The U.S. will sell $29 billion of two-year notes on Oct. 28, $35 billion of five-year debt on Oct. 29 and $29 billion of seven-year securities on Oct. 30. The U.S. will also sell $15 billion of two-year floating-rate notes on Oct. 29.

Bond Rally

Treasuries rallied this month amid concern Ebola is spreading and Europe’s economy may fall into a recession. U.S. 10-year yields dropped to 1.86 percent on Oct. 15, the lowest since May 2013, and a measure of volatility climbed to the highest in more than a year the same day.

“Ebola came back and took the market’s focus off the fundamentals, which is where it belongs,” GMP’s Miller said. “Ebola today is just creating some distraction from the bigger Fed story next week.”

A doctor in New York City tested positive for Ebola. The doctor, Craig Spencer, is being treated in an isolation unit at Bellevue Hospital Center in midtown Manhattan. The diagnosis marked the deadly virus’s entry into the most populous U.S. city. Almost 10,000 people have been infected with Ebola in Guinea, Liberia and Sierra Leone and about half have died, according to the World Health Organization.

Twenty-five lenders in the European Central Bank’s euro-area bank health check are set to fail the regulator’s Comprehensive Assessment, according to a draft communique of the final results, seen by Bloomberg News.

Treasuries gained 5.2 percent this year, according to Bloomberg World Bond Indexes. German bunds returned 0.7 percent this month, while Greek debt lost 12 percent in the period.

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