Tags: treasurys | TIPS | sale | 3-year

Treasury 10-Year Yield Reaches 1-Month High as US Sells Notes

Tuesday, 07 August 2012 03:49 PM

Treasurys dropped, pushing 10-year yields to the highest level in a month, as better-than-estimated corporate earnings damped the allure of Treasurys and sent yields higher at a $32 billion sale of three-year debt.

The securities, which mature in August 2015, drew a yield of 0.370 percent, compared with the average forecast of 0.361 in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. The U.S. will sell $24 billion of 10-year notes tomorrow and $16 billion of 30-year bonds on Aug. 9.

“We got back to yield levels that made sense,” said Brian Edmonds, head of interest rates at primary dealer Cantor Fitzgerald LP. “The world is not really a safer place, but we’re seeing risk-on and a pretty good move in equities. It’s taken some of the steam out of Treasurys. At these levels we should see pretty good demand tomorrow and Thursday.”

The yield on the current 3-year note rose four basis points, or 0.04 percentage point, to 0.36 percent, at 2:59 p.m. in New York, according to Bloomberg Bond Trader prices. The yield on the benchmark 10-year note climbed six basis points to 1.63 percent, touching the highest level since July 2.

The Standard & Poor’s 500 Index rose toward the highest level since April.

Auction Demand

“It was an adequate auction,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Stocks are doing better and it puts more pressure on Treasurys. Things are not as bad as everyone once predicted. It traps the Fed into doing nothing now.”

Fed Bank of Boston President Eric Rosengren said the inflationary effects of the central bank’s securities-purchase programs are a real concern, in an interview with CNBC.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities (TIPS), rose to 2.21 percentage points, touching the highest since May. The average during the past decade is 2.15 percentage points.

The difference between yields on 5-year notes and similar-maturity TIPS rose to 1.95 percentage points, the highest since May 11. The average during the past decade is 1.94 percentage points.

Bid Levels

At today’s sale of notes, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.51, the lowest since April and compared with an average of 3.49 for the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 29.7 percent of the notes, compared with an average of 34.9 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.4 percent of the notes at the sale, the lowest since April and compared with an average of 9.9 percent for the past 10 auctions.

Three-year notes have returned 0.4 percent this year, compared with a 2.4 percent gain for Treasurys overall, according to Bank of America Merrill Lynch indexes. The three-year securities returned 3.4 percent in 2011, while Treasurys overall gained 9.8 percent.

Bull Break

The yield on the 10-year note is poised to climb to 1.67 percent with the break today of 1.596 percent, MacNeil Curry, head of foreign-exchange and interest rates technical strategy in New York at Bank of America Merrill Lynch, said in an interview. A break of 1.67 percent means an end to the four month bull run, he said.

The firm is still bullish, calling for 1.24 percent on the 10-year security, but a break of 1.67 percent would “force us to abandon this view,” he wrote in a report today. The “1.67 is the line in the sand,” he said in the interview. “If it breaks, I’m going to go back to the drawing board.”

On the 30-year bond, “a sustained break of 2.692 percent opens a move towards 2.84 percent,” Curry wrote. “A move through indicates a medium-term turn in trend. Until then, we remain bullish for 2.07 percent.”

Investor appetite for the safety of Treasurys ebbed this month when a U.S. employment report for July showed the nation added 163,000 jobs, more than the 100,000 projected by economists surveyed by Bloomberg News. It was the first time since the report for February, released March 9, that the number of jobs created exceeded the consensus forecast.

The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing to cap borrowing costs. It’s now in the process of swapping shorter-term Treasurys in its holdings with those due in six to 30 years to put downward pressure on long- term borrowing costs.

The Fed purchased $4.5 billion of Treasurys due from August 2018 to May 2020 today as part of the program, according to the Fed Bank of New York website.

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Tuesday, 07 August 2012 03:49 PM
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