Treasuries Pare Advance Before Auction as Verizon Sells Bonds
Treasuries pared gains as the U.S. prepares to auction $21 billion in 10-year notes and Verizon Communications Inc. sold a record $49 billion in corporate securities.
Government-bond prices rose earlier as traders speculated that the unprecedented Verizon sale would lead to the unwinding of hedges used to guard against higher yields. The benchmark Treasuries being sold today yielded 2.955 percent in pre-auction trading, which would be the highest level since June 2011. Federal Reserve officials will meet Sept. 17-18 to discuss whether to slow $85 billion in monthly debt purchases.
“There’s a lot of supply to bid on here,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the Fed. “Next Wednesday, the Fed may be changing policy. I’m not sure people are comfortable jumping in here ahead of a huge policy decision. More people are willing to see how it all plays out.”
The U.S. 10-year yield was little changed at 2.96 percent at 12:43 p.m. in New York after earlier dropping four basis points, or 0.04 percentage point, to 2.92 percent, according to Bloomberg Bond Trader prices. The yield climbed to 3.01 percent on Sept. 6, the highest level since July 2011.
As companies sell debt, they enter into so-called 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.
Verizon, the second-biggest U.S. telephone carrier, sold $49 billion of bonds in an eight-part offering, the biggest company debt sale ever, according to a person with knowledge of the issue, who requested anonymity because terms aren’t set.
The fixed-rate debt carries maturities ranging from three to 30 years as well as two portions of floating-rate securities, said the person. The deal will help fund Verizon’s buyout of Vodafone Group Plc’s stake in Verizon Wireless, the largest and most profitable U.S. wireless carrier.
Treasuries have lost 1.7 percent since the end of June, headed for a fourth quarterly decline, according to Bank of America Merrill Lynch indexes.
Today’s 10-year debt auction is the second of three sales of $65 billion of U.S. notes and bonds this week. The benchmark securities drew a yield of 2.62 percent at the previous auction of the maturity on Aug. 7. Investors bid for 2.45 times the amount of available debt, the lowest bid-to-cover ratio since March 2009.
“Given the backup in yields, Treasuries are more attractive in yields than they have been for some time,” said Dan Greenhaus, chief global strategist in New York at broker-dealer BTIG LLC.
Treasuries snapped a decline that had pushed 10-year yields above 3 percent on Sept. 6 after a report showing the U.S. added fewer-than-forecast workers in August fueled bets the Fed will slow stimulus less aggressively than previously anticipated. The 169,000 addition in jobs compared with the median forecast of 180,000 in a Bloomberg News survey and followed a revised 104,000 increase in July that was 58,000 jobs lower than initially estimated.
Newton Investment Management is paring short positions in Treasuries, betting a likely announcement by the Fed next week of a reduction to its asset purchases will spur a short-term rally in the securities. Short positions are wagers an asset will decrease in value.
Newton is reducing some shorts versus benchmarks and in absolute terms in 10-year and 30-year Treasuries as tactical moves, said Paul Brain, head of fixed income, in an interview.
Yields may rise above 3 percent, although not dramatically, as the U.S. economic recovery is still fragile and higher rates pose risks to the housing market, Brain said, adding that yields may drop toward 2.5 percent before year end.
Jeffrey Gundlach, manager of the $36 billion DoubleLine Total Return Bond Fund, said the Fed is making a “big mistake” in the way it ends its unprecedented asset-purchase program.
“We thought the Fed wouldn’t walk away from QE,” or quantitative-easing, and would buy securities until targeted yields were reached, Gundlach said yesterday during a webcast for DoubleLine Capital LP’s investors. Instead, the central bank is opting for a “seat of the pants” way of handling policy, said the manager, whose firm is based in Los Angeles.
Fed Chairman Ben S. Bernanke and his colleagues will decide to reduce Treasury bond purchases to $35 billion from $45 billion at next week’s meeting while maintaining mortgage-bond buying at $40 billion, according to the median of 34 responses in a Bloomberg News survey of economists on Sept. 6.
The Fed bought $1.5 billion of Treasuries today due from February 2038 to February 2043 as part of the stimulus program.
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