Treasuries fell for the first time in three days after Spain raised more than its maximum target at a bill auction and Germany’s ZEW report showed investor confidence unexpectedly rose, damping demand for safer assets.
Ten-year note yields climbed from the lowest level in six weeks before U.S. reports today that economists said will show home starts increased and industrial output expanded, adding to signs the recovery is gaining momentum. Treasuries have handed investors a loss of 0.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The MSCI All-Country World Index (MXWD) of stocks returned 9.5 percent including reinvested dividends.
“Risk sentiment has improved modestly since the ZEW data and Spain’s bill auction,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “Peripheral bond markets are better bid and consequently core markets such as Treasuries and bunds are better offered.”
The yield on the benchmark 10-year note climbed three basis points, or 0.03 percentage point, to 2.01 percent at 7:14 a.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2022 fell 7/32, or $2.19 per $1,000 face amount, to 99 30/32. The yield dropped to 1.94 percent yesterday, the least since March 6.
Spain sold 3.18 billion euros ($4.18 billion) of 12- and 18-month bills, surpassing the government’s target of 3 billion euros. The ZEW Center for European Economic Research in Mannheim said its index of German investor and analyst expectations unexpectedly climbed for a fifth month to the highest level since June 2010.
U.S. home starts rose to a 705,000 annual rate in March following a 698,000 pace the previous month, according to a Bloomberg News survey before the Commerce Department data today. Industrial production gained 0.3 percent in March after being little changed in February, a separate survey of economists showed before the Federal Reserve releases the figure.
The 10-year Treasury yield will likely remain in a near- term range of 1.95 percent to 2.05 percent, Lloyds’s Wand said. “Unless we see signs of unequivocally positive data out of the U.S., then higher yields will still attract buyers,” he said. “The European situation is decidedly uncertain.”
Ten-year Treasury yields were below 2 percent for a third day in earlier trading. Yields less than 2 percent may be too low given the signs of a U.S. economic recovery, according to Toyota Asset Management Co., a unit of the world’s biggest automaker by market value.
“The U.S. economy keeps recovering modestly,” said Masaru Hamasaki, who helps oversee the equivalent of $22 billion as chief strategist at Toyota Asset Management in Tokyo. “Yields at current levels are too low.”
The 10-year yield will increase to 2.57 percent by year- end, according to the average forecast in a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has widened to 2.27 percentage points from 1.95 percentage points at the end of last year. The average over the past decade is 2.14 percentage points.
The five-year, five-year forward break-even rate, a measure of traders’ inflation expectations that the Fed uses to help guide monetary policy was at 2.71 percent on April 12, below its 2.76 percent average during the past decade.
The U.S. plans to sell $16 billion of five-year TIPS on April 19. Merrill Lynch’s TIPS index has gained 2.5 percent this year, reflecting demand for inflation protection.
The Fed has pledged to keep its benchmark interest rate near zero until late 2014 to support growth. The U.S. central bank is also replacing $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs. It is scheduled to buy as much as $2 billion of Treasuries due from 2036 to 2042 today as part of the program, according to the New York Fed’s website.
The 30-year bond yield may fall toward a seven-week low should it break below its 100-day moving average at 3.11 percent, according to data compiled by Bloomberg. The rate dropped to 3.09 percent yesterday, the lowest since March 7. The yield may find support at its Feb. 28 low of 3.02 percent. Support refers to an area where buy orders may be clustered.
The yield on the 30-year Treasury increased two basis points today to 3.15 percent.
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