Tags: Investors | Treasurys | Doubts | Surface

Investors Sell Treasurys for 4th Day as Doubts Begin to Surface

Tuesday, 03 Jun 2014 05:39 PM

The price of the Treasury 10-year note declined on Tuesday for a fourth day, matching the longest skid since October, as investors judged as excessive a rally that last week took yields to the lowest in almost a year.

Treasurys pared last week’s gains even amid reports the European Central Bank is likely to signal any interest-rate cut this week won’t necessarily be the final one. U.S. debt dropped as factory orders climbed in April for a third month, while nonfarm payrolls data June 6 may show the economy added more than 200,000 jobs for a fourth month, according to a Bloomberg survey. Benchmark 10-year yields rose the most in more than six weeks Monday as the Institute for Supply Management’s manufacturing index expanded at the fastest pace this year.

“It’s a continuation of a little bit of a retracement from the rally last week,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “A strong ISM number has given the bears some ability to continue with their shorts and the market continues to slide. Any announcement by the ECB that would have large market implications has been priced in.” A short is a bet the price of a security will drop.

The Treasury 10-year yield increased seven basis points, or 0.07 percentage point, to 2.6 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data, the highest level since May 14. The 2.5 percent note maturing in May 2024 fell 5/8, or $6.25 per $1,000 face amount, to 99 1/8.

The yield rise is the biggest increase on a closing basis since April 17. It fell to 2.40 percent last week, the least since June 21, 2013.

Forward Rates

Forward rates show that investors expect the 10-year U.S. Treasury yield to rise to 2.76 percent by year-end, according to Bloomberg Industries senior financial analyst Alison Williams.

That’s below the 3.25 percent median estimate in a Bloomberg survey of 73 economists and strategists. Consensus estimates were also for higher yields entering 2014, and tend to be slower to adjust, she said. At the start of the year, the median consensus forecast was 3.44 percent.

Investors in Treasurys increased bets the prices of securities would drop in value to the most since May 2006, according to a survey by JPMorgan Chase & Co.

The proportion of net shorts was 29 percentage points in the week ending Monday, up from 18 percentage points the previous week, according to JPMorgan. Setting a short means borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.

‘Overbought Levels’

The percent of outright shorts, rose to 40 percent, from 35 percent the previous week. The percent of outright longs, or bets the securities will rise in value, dropped to 11 percent as of Monday from 17 percent.

Investors raised neutral bets to 49 percent, up from 48 percent the previous week, the survey reported.

“There’s a little bit of a correction off the overbought levels we reached last week,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The market got ahead of itself and priced in a lot of good things from the ECB. We’re looking at what the ECB is going to do and what NFP is going to be.”

U.S. government debt extended a drop after factory orders climbed 0.7 percent in April, the Census Bureau reported Tuesday, versus a forecast for a 0.5 percent rise in a Bloomberg News survey of economists. March orders were revised up to 1.5 percent.

ECB Outlook

ECB policy makers are debating a cut of 10 or 15 basis points in both the benchmark and deposit rates at their Thursday meeting, according to two euro-area central bank officials. ECB President Mario Draghi will probably reiterate his commitment to keep borrowing costs at present or lower levels, the people said, asking not to be identified because the talks aren’t public.

Treasury two-year yields at 0.40 percent were at the highest level relative to similar-maturity German debt since 2012 on speculation the ECB will cut rates.

The yield difference, or spread, between the securities expanded to 33 basis points, the widest since August 2012 based on closing prices.

Forty-four of 50 economists surveyed by Bloomberg News predict the ECB will become the first major central bank to take interest rates below zero by cutting its deposit rate on June 5. All except two of 60 respondents in a separate Bloomberg survey said the ECB will also cut its main refinancing rate.

Factories, Jobs

Treasurys fell Monday as the ISM’s factory index rose to 55.4 last month, the highest since December, from 54.9 in April.

Data on Friday is expected to show the U.S. added 215,000 jobs in May, versus 288,000 in April, based on responses from economists in a separate survey.

The Bloomberg U.S. Treasury Bond Index has risen 3.2 percent this year, trimming gains after being up as much as 3.6 percent last week.

A measure of Treasuries volatility rose to a two-month high, adding to pressure on the securities. Three-month implied volatility on 10-year yields based on options touched 70 basis points, the highest since April 1, according to closing-market rates. The gauge is a measure of projected yield fluctuations over the next 90 days.

The Bank of America Merrill Lynch MOVE Index, which measures price swings based on options, climbed to 60.94 from 54.7 on April 9, which was the lowest level in the past year. Volatility has slumped in 2014, with the index averaging 60, versus 91.9 in the preceding five years.

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The price of the Treasury 10-year note declined on Tuesday for a fourth day, matching the longest skid since October, as investors judged as excessive a rally that last week took yields to the lowest in almost a year.
Investors, Treasurys, Doubts, Surface
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2014-39-03
Tuesday, 03 Jun 2014 05:39 PM
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