Treasuries Recover Loss as Oil Deal Seen Lacking `Shock and Awe'

  • Benchmark notes post biggest two-day drop in two months
  • Citigroup closes its Oct. 6 recommendation to buy 10-year note

Bond Traders Must Yield to Market's Broken Signals

Treasuries fell, with 10-year notes posting their biggest two-day drop since December, as a wave of corporate-bond issuance weighed on demand for government securities.

Yields rose alongside U.S. stocks as investors made room for debt offerings from companies including Apple Inc and IBM. Apple sold $12 billion of debt in nine parts, the second-biggest investment-grade corporate offering in the U.S. this year. The largest component consisted of $2.5 billion in 30-year bonds.

“There’s this huge demand for duration, and a lot of that bid is going to be focused on sopping up these new deals,” said Thomas Simons, money-market economist at Jefferies Group LLC in New York, one of 22 primary dealers that trade with the Federal Reserve.

Turmoil in global financial markets has driven demand for the relative safety of U.S. government debt in 2016, propelling Treasuries to a 2.4 percent gain as traders pared bets that the Fed will raise interest rates this year. Analysts at Citigroup Inc. on Tuesday indicated the rally may be overextended and closed out their Oct. 6 recommendation for clients to buy the 10-year note.

Treasury 10-year note yields rose two basis points, or 0.02 percentage point, to 1.77 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 fell 7/32, or $2.19 per $1,000 face amount, to 98 21/32.

‘Extreme Sentiment’

The yield increased 11 basis points in the past two trading sessions, the most since Dec. 14-15. Since Citigroup introduced its 10-year note call, the yield has dropped 26 basis points, while debt maturing between seven and 10 years has returned 1.6 percent.

In addition to Apple’s sale, IBM sold $5 billion of debt in five parts as companies look to lock in cheap borrowing costs after benchmark Treasury yields fell close to record lows last week.

"We’ve been biased for higher yields this week because the move is overdone," said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "There may be some people who have been parked in Treasuries looking for higher-yielding, high-quality assets" who will shift to corporate debt, he said.

Treasury yields will climb longer term, according to the average of economist estimates compiled by Bloomberg. The 10-year yield will reach 2.46 percent by year-end, according to the survey, which gives the most recent forecasts the heaviest weightings.

“You can get yield rallies from just a lack of negative news given how extreme sentiment has gotten,” said Rickard Kelly, global head of strategy at Toronto Dominion Bank in London.

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