Tags: Treasury | Yield | Curve | Fed

Treasury Yield Curve Narrowest Since 2009 on Fed Rate Bets

Thursday, 27 Mar 2014 03:58 PM

The gap in yields between U.S. five- and 30-year Treasurys narrowed to the least in four years as traders speculated economic growth may be robust enough for the Federal Reserve to raise interest rates next year.

An auction of $29 billion of seven-year notes attracted the strongest demand from investors that place bids directly with the Treasury since the U.S. resumed selling the maturity in 2009. Yields on 30-year bonds slid below 3.5 percent for the first time since July as initial jobless claims dropped and the economy grew. Short-to-medium-maturity Treasurys tumbled last week after Fed Chair Janet Yellen suggested the central bank may end bond-buying this fall and lift borrowing costs six months later.

“People are much more comfortable with curve trades, if they want to have a bias toward the Fed tightening faster than expected,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. The 30-year bond also gained on “allocations from stocks into bonds.”

Treasury five-year note yields rose one basis point, or 0.01 percentage point, to 1.70 percent as of 3:27 p.m. Thursday in New York, according to Bloomberg Bond Trader prices. The price of the 1.625 percent note due in March 2019 fell 1/32, or 31 cents per $1,000 face value, to 99 20/32.

Thirty-year bond yields fell two basis points to 3.52 percent and touched 3.49 percent, the lowest since July 3. The benchmark 10-year note yield declined two basis points to 2.68 percent and touched 2.66 percent, the lowest since March 17. The average over the past decade is 3.46 percent. Seven-year note yields were little changed at 2.25 percent.

Note Auction

The securities sold Thursday priced at a yield of 2.258 percent, compared with the pre-auction forecast of 2.261 percent in a Bloomberg News survey of nine of the Fed’s 22 primary dealers required to bid at U.S. government-bond offerings

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.59, compared with the average for the past 10 auctions at 2.56.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 32.6 percent of the notes, the most on record going back to 2009 and compared with an average of 19.5 percent at the past 10. Primary dealers purchased 26 percent, the least going back to 2009.

“Demand is decent at these levels,” said Gabriel Mann, a U.S. government-bond strategist in Stamford, Connecticut, at Royal Bank of Scotland’s RBS Securities Inc., a primary dealer. “Guys are taking a stab here.”

‘Higher Rates’

The gap between the five-year note yield and the 30-year bond, known as the yield curve, narrowed to 1.8 percentage points, the least since October 2009.

A yield curve plots the rates of bonds of the same quality, but different maturities. It steepens when yields on shorter- maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously. Longer-term bonds tend to rise or fall based on the outlook for inflation, while shorter maturities are anchored by the Fed’s policy rate.

“Fundamentally, we’re going to higher rates,” Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York, said. “Guys are jumping on momentum.”

Ten-year yields will rise to 3.35 percent by year-end, based on a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.

GDP, Unemployment

Gross domestic product grew at a 2.6 percent annualized rate from October through December, more than the 2.4 percent gain reported last month, figures from the Commerce Department showed Thursday in Washington. The median forecast of 79 economists surveyed by Bloomberg called for a 2.7 percent increase.

Jobless claims decreased by 10,000 to 311,000 in the period ended March 22, Labor Department data showed Thursday in Washington. The median forecast of 49 economists surveyed by Bloomberg called for 323,000 claims. The four-week average of applications filed with state agencies dropped to the lowest level since September.

“People are shunning the front-end — the economy is gaining strength and the Fed is going to have to possibly step up their reduction of tapering,” said Charles Comiskey, New York-based head of Treasury trading at primary dealer Bank of Nova Scotia in New York. “The data that came out was better than expected.”

Fed Moves

Yellen said on March 19 that policy makers may increase the federal funds rate, which banks charge each other for overnight loans, by the middle of 2015 if economic growth warrants it.

Fed board members cut the monthly bond purchases to $55 billion last week, from $85 billion in 2013. The central bank purchased $4.223 billion of notes maturing between March 2019 and November 2019 Thursday as part of the program.

Thursday’s note sale was the last of four auctions of coupon- bearing debt this week. The government auctioned $35 billion of five-year notes Wednesday at a yield of 1.715 percent and $32 billion of two year notes the day before at 0.469 percent. Both yields were the highest since 2011. It also held its third auction of two-year floating-rate notes Wednesday.

When added to a $13 billion sale of 10-year Treasury Inflation Protected Securities on March 20, the auctions total $122 billion. They will raise $50.6 billion of new cash, as maturing securities held by the public total $71.4 billion, according to the Treasury.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for U.S. consumer prices over the life of the debt, was 2.15 percentage points. The average over the past decade is 2.21 percentage points.

Ten-year Treasurys yielded 1.15 percentage points more than similar-maturity German debt on a closing price basis, within three basis points of the widest spread since June 2006.

Treasurys maturing in 10 years and longer have returned 0.8 percent in March, based on Bloomberg World Bond Indexes.

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The gap in yields between U.S. five- and 30-year Treasurys narrowed to the least in four years as traders speculated economic growth may be robust enough for the Federal Reserve to raise interest rates next year.
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Thursday, 27 Mar 2014 03:58 PM
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