Treasuries Decline as Record Saudi Bond Sale Weighs on U.S. Debtby
Kingdom raises $17.5 billion in largest emerging-market deal
Traders await ECB meeting Thursday for signals on stimulus
Treasuries fell as Saudi Arabia’s $17.5 billion bond sale -- the largest ever from an emerging-market nation -- weighed on U.S. sovereign debt.
Benchmark yields rose as Saudi Arabia sold the dollar-denominated bonds, with proceeds to go toward shoring up finances battered by a slide in oil. The deal came as companies including Wells Fargo & Co. and Mondelez International Inc. sold debt, putting U.S. corporate bond sales on track for their busiest week in a month, with issuance set to top $25 billion.
“Anytime you see a big new issuer coming in, there’s a potential for crowding out,” said George Goncalves, head of U.S. interest-rates research at Nomura Securities, one of 23 primary dealers that trade with the Federal Reserve. “It doesn’t help the Treasury market, that’s for sure.”
Treasuries have slumped in October as a bond-market gauge of inflation expectations has climbed near the highest five months. In a speech at a Boston Fed conference last week, Chair Janet Yellen laid out the argument for keeping monetary policy easy while hinting at letting the economy run hot. Traders see policy tightening this year as an odds-on proposition, even if markets are also pricing in a gradual pace of future increases.
Treasury 10-year yields rose about one basis point, or 0.01 percentage point, to 1.74 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 rose 1/32 to 97 26/32.
The Saudi offering eclipsed Argentina’s $16.5 billion sale in April as the largest-ever from a developing nation. It followed a week of presentations to prospective buyers at which officials emphasized the kingdom’s efforts to diversify the $650 billion economy away from oil.
In addition to potentially luring away U.S. debt investors seeking higher yields, heavy sovereign and corporate issuance can weigh on Treasuries through the mechanics of how bonds are sold. Issuers of dollar-denominated debt often enter into what’s known as rate-lock agreements, in which they bet on Treasury prices falling to guard against higher yields. Once the debt is sold, the wagers are ended.
"The rate-lock unwinds were a little smaller than the amount of people who needed to sell or hedge against the deal," said Thomas Roth, senior Treasury trader in New York at MUFG Securities Americas Inc. “Rate-lock unwinds typically create buying of Treasuries."
The probability of a U.S. rate increase by December is about 64 percent, fed fund futures indicate. The calculations assume that the effective fed funds rate will average 0.625 percent after the next increase. Swaps trading implies the rate will be about 0.65 percent in a year, and 0.77 percent in two years, according to data compiled by Bloomberg.
The U.S. economy maintained a steady growth pace between late August and early October, as a tight labor market with nascent wage pressures contributed to a “mostly positive” outlook, according to the Fed’s latest Beige Book, an economic survey by reserve banks.
The gap between yields on five- and 30-year debt, a gauge of the yield curve, was about 1.28 percentage points, near the highest since June.
Traders await the European Central Bank’s policy-setting meeting Thursday for signals about its monetary stimulus efforts. Most economists in a Bloomberg survey predict it will prolong its 1.7 trillion-euro ($1.9 trillion) bond-buying program in December and won’t start to taper its asset purchases before the second half of 2017.
“There aren’t going to be any significant changes tomorrow," said David Keeble, New York-based head of fixed-income strategy at Credit Agricole SA. "Without the taper talk, I think longer-dated bonds will do pretty well.”