Treasuries Fall as Fed Minutes Weigh on 10-Year Auction Demand
Treasuries fell for a third day after minutes from the Federal Reserve’s last meeting showing several members in favor of pulling back on its bond-buying program weighed on demand at the government’s 10-year auction.
The $21 billion in notes drew a yield of 1.795 percent, compared with a forecast of 1.789 percent in a Bloomberg News survey of 10 of the Fed’s primary dealers. The minutes showed that some Federal Open Market Committee members said the central bank should stop by year-end its monthly $85 billion of Treasury and mortgage-debt purchasing. Stocks rose to all-time highs.
“It’s partially because of the Fed and the risk-on environment seeping in,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “There’s a bit of optimism that hasn’t been present over the last couple of days. People are getting excited believing it’s the next leg up in equities and down in Treasuries.”
The yield on the current 10-year note rose five basis points, or 0.05 percentage point, to 1.8 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note due February 2023 fell 15/32, or $4.69 per $1,000 face amount, to 101 3/4. The yield dropped to 1.68 percent on April 5, the lowest level since Dec. 12.
Thirty-year bond yields rose seven basis points to 3 percent, touching that level for the first time since April 4.
The Standard & Poor’s 500 Index (SPX) rose to an intraday record of 1,589.07.
U.S. government securities were the least costly since April 2 with the 10-year term premium, a model that includes expectations for interest rates, growth and inflation, at negative 0.76 percent. It touched negative 0.82 percent on April 5, the most expensive level since December. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
“Fed Minutes express increasing caution on length of QE,” Bill Gross, co-chief investment officer at Pacific Investment Management Co., manager of the world’s biggest bond fund, wrote in a Twitter post. It “puts focus on an extended policy rate.” Gross recommended investors purchase five- to 10-year securities.
The FOMC members “thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end,” according to the record of the March 19-20 meeting released today in Washington ahead of the regularly scheduled 2 p.m. time.
Fed officials, who met before a Labor Department report last week showed payroll growth of 88,000 in March was the slowest in nine months, debated how and when to curtail asset purchases that have swollen its balance sheet to a record $3.22 trillion.
The committee, led by Chairman Ben S. Bernanke, decided to press on with $85 billion in monthly bond buying until the labor-market outlook has “improved substantially.”
“The meeting minutes, from our perspective, didn’t really mean a whole lot because of that 88,000 print,” said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, which oversees $15 billion in assets. “All that number did on Friday was to confirm the $85 billion a month of Treasury and mortgage-backed purchases is going to go on.”
The 10-year auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.79, compared with an average of 2.95 for the previous 10 sales.
“The bid-to-cover was a little on the light side -- it’s disappointing,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “There’s a lot of interest at 2 percent, there’s just not as much interest from 1.75-to-1.80 percent.”
Indirect bidders, an investor class that includes foreign central banks, purchased 37.3 percent of the notes, compared with an average of 36.9 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 29.1 percent of the notes, compared with an average of 23.2 percent at the last 10 auctions.
Ten-year U.S. debt has returned 0.7 percent this year, more than the 0.4 percent gain in the broader Treasury market, according to Bank of America Merrill Lynch indexes. The benchmark notes returned 4.2 percent in 2012, compared with a 2.2 percent gain by Treasuries overall.
This is the second of three auctions this week as the government sells $66 billion of notes and bonds. It auctioned $32 billion of three-year securities yesterday and is due to sell $13 billion of 30-year debt tomorrow. The sales will raise $6.7 billion of new cash, as maturing securities held by the public total $59.3 billion, according to the Treasury.
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