Bloomberg News

Treasuries Fall as U.S. Sells $21 Billion Notes Before End of Fed Meeting

March 13, 2012

Treasuries (YCGT0025) fell for a fifth day as a report showing U.S. retail sales rose the most in five months damped speculation Federal Reserve officials will hint at more stimulus measures at the conclusion of today’s policy meeting.

Yields on benchmark 10-year notes at almost a two-month high bolstered demand at a government sale of $21 billion of the securities. The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 3.24, compared with 3.1 for the past 10 sales.

“The yields have backed up in accordance with the stronger economic news,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 primary dealers firms that trade with the central bank. “The Fed may mention that the economic news has improved, but yet they are very much alert to any signs of economic weakness and stand ready to act. Given what they see, they may give a plug to the economy, but we won’t see any earth shattering information.”

Yields on benchmark 10-year notes rose three basis points to 2.07 percent at 1:41 p.m. New York time, according to Bloomberg Bond Trader prices. The yield touched 2.09 percent, the highest level since Feb. 23.

The notes were auctioned today at a yield of 2.076 percent, equaling the forecast in a Bloomberg News survey of nine primary dealers.

JPMorgan Survey

Indirect bidders, an investor class that includes foreign central banks, purchased 38.6 percent of the notes, compared with an average of 43.9 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 19.4 percent of the notes at the sale, versus an average of 13.2 percent for the past 10 auctions.

Treasuries investors in a weekly survey by JPMorgan Chase & Co. bet for the first time since January that prices of the securities will drop. Net shorts, or wagers that prices will fall, outweighed net longs by 2 percentage points in the week ended yesterday. Fifty-seven percent of the clients surveyed were neutral.

Volatility in the Treasuries market declined yesterday to the lowest level in more than four years. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, dropped to 69.9, the least since July 2007. The gauge was as high as 117.8 on Aug. 8. The reading means traders expect a yield range of 69.9 basis points on an annualized basis in the next month.

Fed Meeting

Price swings have narrowed as the Fed’s debt-purchase programs made it the biggest owner of U.S. government securities, according to Treasury and central bank data. The Fed had holdings of $1.66 trillion as of Dec. 31, the data show, compared with China’s $1.15 trillion.

The Federal Open Market Committee is scheduled to issue its statement at about 2:15 p.m. New York time after a policy meeting.

“We may see a slight upgrade in economic conditions,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said of today’s Fed statement. The firm oversees $12 billion in fixed-income assets.

The best six months of job gains since 2006 have helped reduce the odds of a third round of asset purchases by the Fed, according to a Bloomberg News survey of economists. U.S. payrolls expanded by 227,000 jobs in February, capping the growth streak, Labor Department data showed last week.

Prior Testimony

Sixty-one percent of respondents in a March 9-12 Bloomberg News survey said Fed Chairman Ben S. Bernanke will refrain from any action to expand the central bank’s $2.89 trillion balance sheet this year. In January, 50 percent of those surveyed predicted more bond buying.

Bernanke, in Senate testimony before a March 9 jobs report, gave no sign he’s considering a new program of so-called quantitative easing. Still, he repeated that the main interest rate is likely to stay near zero through at least late 2014 to boost a job market that remains “far from normal.”

The Fed chief said on Jan. 25 after the central bank’s previous meeting that policy makers were considering additional asset purchases to boost growth. The central bank bought $2.3 trillion of securities in two rounds of quantitative easing from December 2008 to June 2011.

Treasuries fell earlier after Commerce Department data showed retail sales increased 1.1 percent in February, matching the forecast in a Bloomberg News survey of economists. The figure compared with a revised 0.6 percent increase the previous month.

Inflation Bets

The difference in yield between Treasury Inflation Protected Securities (USGGBE10) and nominal bonds, known as the break-even rate, indicated before the auction that investors expect consumer prices to rise 2.32 percent annually over the next 10 years. The average over the past year is 2.19 percent.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said in a message on Twitter that if investors want to bet on Treasuries rising, they should own them in TIPS form.

At yesterday’s $32 billion sale of three-year notes, indirect bidders bought 34.6 percent of the securities, compared with an average of 36.8 percent during the past 10 sales.

U.S. 10-year yields will increase to 2.54 percent by year- end, according to the average forecast in a Bloomberg News survey, with the most recent projections given the heaviest weighting.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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