Tags: Treasury Yields at Almost 2011 Low on Housing Recovery Concern

Treasury Yields at Almost 2011 Low on Housing Recovery Concern

Tuesday, 24 May 2011 07:36 AM

Treasury 10-year note yields were within five basis points of this year’s low before a government report forecast by economists to show the U.S. housing market is struggling to recover.

Greek two- and 10-year yields touched record highs today on speculation the euro region’s debt crisis is deepening as Greece’s biggest opposition party said the government’s policies won’t spark economic growth. The U.S. plans to auction $35 billion of two-year securities today in the first of three note auctions totaling $99 billion.

China’s current account surplus fell in the first quarter.

“The fear factor that is out there, related to the euro zone and related to U.S. and Chinese growth prospects, is certainly the rationale for why yields are where we are,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “It depends on how much more traction the fear factor gets today. New home sales will play into that.”

The benchmark 10-year note yield increased one basis point, or 0.01 percentage point, to 3.14 percent at 6:57 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent security due in May 2021 dropped 1/32, or 31 cents per $1,000 face amount, to 99 29/32. The yield decreased on May 18 to 3.09 percent, the lowest level since Dec. 7.

Sales of U.S. new homes were unchanged at a 300,000 annual pace in April after falling to a record low 270,000 in February, according to the median forecast of 75 economists in a Bloomberg News survey before the Commerce Department’s report today.

Bullard’s Outlook

Federal Reserve Bank of St. Louis President James Bullard said the central bank may keep its policy rate, the size of its balance sheet and policy language the same after completing asset purchases in June.

Past behavior of the policy board “indicates that the Committee sometimes puts policy on hold,” Bullard said yesterday in Farmington, Missouri. A pause “gives the Committee more time to assess economic conditions,” he said.

Fed funds futures indicated a 13 percent chance the Fed will raise its target lending rate by December, down from a 24 percent probability a month ago.

The central bank is scheduled to purchase up to $7 billion of bonds due from November 2013 to May 2015 today under the $600 billion program of debt purchases ending next month.

The yield on 10-year Treasurys fell below the inflation rate for the first time since October 2008, making the securities less attractive. The difference between 10-year yields and the inflation rate, known as the real yield, was minus six basis points.

‘Lot of Fear’

“In the short term, with CPI where it is, negative real yields are very difficult to justify without a lot of fear” in the market, said Ostwald.

Gains in Treasurys were limited as the U.S. government prepared to sell notes this week. In addition to today’s sale, the U.S. will auction $35 billion of five-year securities tomorrow and $29 billion of seven-year debt May 26.

“Auctions increase supply, and so are negative for Treasurys,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at a unit of BNP Paribas, one of the 20 primary dealers obliged to participate in debt offerings. “There’s a bit of caution about high prices for Treasurys.”

The two-year notes scheduled for sale today yielded 0.57 percent in pre-auction trading. Investors bid for 3.06 times the amount of available debt on April 26. The average for the past 10 auctions is 3.38.

Indirect Bidders

Indirect bidders, which include foreign central banks, bought 37.9 percent of the securities, versus the 10-sale average of 33.1 percent. Direct bidders, non-primary dealers buying for their own accounts, purchased 13.3 percent.

“The auction should be well-received as short notes are still subject to high demand from investors,” wrote Ciaran O’Hagan, head of European interest-rate strategy at Societe Generale SA in Paris, in an e-mailed note today.

Treasurys have handed investors a 1 percent return in May in what would be a second straight monthly advance, according to an index compiled by Bank of America Merrill Lynch.

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