Bloomberg News

Treasuries Fall After Jobless Claims, TIPS Auction Demand Wanes

February 17, 2012

Feb. 16 (Bloomberg) -- Treasuries fell for the first time in five days after claims for U.S. jobless benefits unexpectedly dropped last week to a four-year low, fueling speculation about faster economic growth and damping demand for haven assets.

U.S. 10-year note yields extended gains after a $9 billion auction of 30-year Treasury Inflation Protected Securities drew a higher-than-forecast yield even as it set an auction record low of 0.77 percent. Haven demand was reduced as the European Central Bank is swapping its Greek bonds for new ones to ensure it isn’t forced to take losses in a debt restructuring, three euro-area officials said. Treasury announced $99 billion of notes auctions for next week.

“The better data is definitely accumulating,” said Daniel Dektar, the chief investment officer at Chapel Hill, North Carolina-based Smith Breeden Associates, which oversees $6.5 billion. “It’s the claims, mostly. We are getting to the point where higher rates are becoming more likely.”

Yields on 10-year notes rose six basis points, or 0.06 percentage point, to 1.98 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 fell 1/2, or $5 per $1,000 face amount, to 100 5/32. Yields earlier exceeded 2 percent for the first time since Feb. 13. The yield has traded as low as 1.79 percent and touched a high of 2.09 percent this year.

Yields on 30-year bonds added five basis points to 3.14 percent. The yield has traded between a low of 2.88 percent and a high of 3.23 percent this year.

Rates Evaluation

“We’re still in this trading range,” said Paul Montaquila, head of fixed-income trading in San Ramon, California, at Bank of the West. “Clearly we’re seeing better economic data at a steady pace, but it’s been frustratingly slow. Rates should be moving higher.”

The 21 primary dealers that trade directly with the Federal Reserve held $106.3 billion in Treasuries as of Feb. 8, the first time they have held more than $100 billion of government debt, according to Fed data. Of that, $102.2 billion are securities maturing in three years or less, the data shows.

Current 30-year TIPS yielded 0.75 percent today. Today’s auction yield compared with 0.999 percent at the last auction of the securities on Oct. 20, which was the least since the government began issuing the securities in 1998. Investors submitted orders to buy 2.46 times the amount of debt offered, compared with a record 3.06 times at the previous sale.

“TIPs are less inexpensive than they were a year ago and that’s helped them to outperform Treasuries,” Dektar said before the auction. “We prefer TIPs to nominal Treasuries.”

Inflation Bets

Investors betting on inflation in the years ahead pushed TIPS to an 18 percent gain in the past 12 months, based on Bank of America Merrill Lynch indexes. Conventional Treasuries returned 11 percent, the data show.

The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices during the life of the debt, was 2.25 percentage points. The 10-year average is 2.14 percentage points.

A measure of traders’ inflation expectations that the Fed uses to help guide monetary policy is at 2.59 percent, down from as high as 3.23 percent last year. The five-year, five-year forward break-even rate, which projects annual price increases over a five-year period beginning in 2017, is below its 2.76 percent average during the past decade.

Investors demanded 2.85 percentage points of extra yield to buy 30-year bonds, which are among the securities that are the most sensitive to inflation, instead of two-year notes. The spread has averaged 2.67 points during the past five years.

Fed Buys

The U.S. central bank purchased $1.8 billion of Treasuries due from February 2036 to February 2042 today as part of its plan to hold down borrowing costs, according to the New York Fed’s website.

The U.S. announced it will sell $35 billion in two-year notes, $35 billion in five-year debt and $29 billion in seven- year securities on three consecutive days next week starting Feb. 21. The size of the two-year note has remained at $35 billion since October 2010, while the size of the five-year note has remained at $35 billion since September 2010, while the size of the seven-year auction has remained at $29 billion since July 2010.

Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed today at 80.1 basis points, near the lowest level since July 2007. The five-year average is 111.9 basis points.

Trading Level

Treasury market volume yesterday dropped. About $290.7 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, above the one-year average of $276 billion.

Germany wants euro-area finance ministers to consider the 130 billion-euro ($170 billion) rescue for Greece at their meeting Feb. 20 along with a bond swap to cut the nation’s debt load, coalition lawmakers were told by German government officials in a briefing today.

As long as Greece meets conditions for the aid, the finance chiefs will probably approve the package along with the debt exchange, three German officials involved in the telephone briefing said. A Finance Ministry spokesman declined to comment.

Minutes of the Fed’s last policy meeting on Jan. 24-25 that were released yesterday showed a few members of the Open Market Committee said economic conditions may warrant more asset purchases, or quantitative easing, “before long.” Central bankers adopted a plan to hold interest rates near zero at least through late 2014 to spur growth and reduce unemployment.

Dealer Survey

The Fed of New York’s survey of primary dealers conducted before policy makers met last month showed the firms saw the probability of another round of asset purchases declining from December.

The median respondent saw a 55 percent chance that the Fed would expand its balance sheet through securities purchases within one year, down from 60 percent odds in the survey conducted before the Federal Open Market Committee’s Dec. 13 meeting, according to results released today by the New York Fed. Dealers also became more confident the U.S. economy would avoid a recession.

Applications for unemployment insurance payments decreased 13,000 in the week ended Feb. 11 to 348,000, less than the lowest forecast of economists surveyed by Bloomberg News and the fewest since March 2008, Labor Department figures showed today. The median survey estimate projected an increase to 365,000.

“Claims was the dominant one -- being below 350,000 shows strong progress,” said John Briggs, a U.S. government-bond strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut, one of 21 primary dealers that trade with the Fed. “If we didn’t have the European situation going on, we would be higher in yields.”

--With assistance from Dan Kruger and John Detrixhe in New York. Editors: Paul Cox, Kenneth Pringle

To contact the reporter on this story: Susanne Walker in New York at

To contact the editor responsible for this story: Dave Liedtka at

Steve Ballmer, Power Forward
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