Treasuries fell for the first time in three days after Spain raised more than its maximum target at a bill auction, buoying global stocks and damping demand for safer assets.
Ten-year note yields climbed from the lowest level in six weeks amid demand for Spain’s debt and as German investors confidence rose. Treasuries dropped even as U.S. home starts unexpectedly decreased and industrial production in the U.S. was unchanged for a second month in March. Stocks advanced after the International Monetary Fund raised economic growth forecasts.
“We’d gotten pretty low in yields, and now the market is catching its breath as risk assets are performing somewhat better,” said Scott Sherman, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Federal Reserve. “There is still a ton of uncertainty surrounding the Fed and Europe, so we should hover around these levels until there is new information.”
The yield on the benchmark 10-year note climbed two basis points, or 0.02 percentage point, to 2.0 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2022 dropped 5/32, or $1.56 per $1,000 face amount, to 100. The yield dropped to 1.94 percent yesterday, the least since March 6.
Standard & Poor’s 500 Index gained 1.6 percent. The Stoxx Europe (SXXP) 600 Index advanced 2 percent.
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 9.8 percent including reinvested dividends.
Housing starts dropped 5.8 percent to a 654,000 annual rate, less than the lowest estimate of economists surveyed by Bloomberg News and the least since October, Commerce Department figures showed today in Washington. The slump was led by the multifamily category, which at the same time showed a jump in permits, a proxy for future construction.
The output last month at factories, mines and utilities held steady, compared with a median projection for a 0.3 percent increase in a Bloomberg News survey of economists, data from the Federal Reserve showed today in Washington. Manufacturing, which makes up about 75 percent of total production, dropped 0.2 percent in March, the most since April 2011.
‘Toward the Downside’
“People are dismissing it as a volatile, multifamily component of the housing-starts data,” Chris Ahrens, head interest-rate strategist in Stamford, Connecticut, at primary dealer UBS AG, said of the homebuilding drop. “We are telling people to trade the 10-year very tactically right now, from 1.95 percent to 2.05 percent, with the thought process that the probability of outcomes are still skewed toward the downside” for yields.
Germany’s ZEW report showed investor confidence unexpectedly rose. 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.
Spain sold 3.18 billion euros ($4.17 billion) of 12- and 18-month bills, surpassing the government’s target of 3 billion euros.
“We are in a relief mode today, in terms of the euro zone,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “There was relief in the Spanish bill sales. The equity market has a bid to it and that in turn has put some upward pressure on Treasury yields.”
The Fed bought $1.88 billion of Treasuries due from 2036 to 2042 today, according to the New York Fed’s website, part of its program to replace $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs. The central bank has pledged to keep its benchmark interest rate near zero until late 2014 to support growth.
The 10-year Treasury note yield would be as high as 3.1 percent if the Fed’s accommodative policies and European debt concerns weren’t present in the market, Adrian Miller, a fixed- income strategist at GMP Securities LLC in New York, said in a telephone interview.
“We will continue to have the questions of what is going on in Europe and what will the Fed do,” he said, “and that will keep us hovering around these levels, putting a lid on perspective increases in rates that would ordinarily result in higher yields.”
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.
JPMorgan Chase & Co. said investors raised expectations for price gains in Treasuries by 10 percentage points to 25 percent, the most on record, in a weekly sentiment survey. Neutral positions decreased by 15 percentage points to 57 percent. Short positions, or bets prices will decline, increased by 6 percentage points to 19 percent.
The world economy will expand 3.5 percent this year and 4.1 percent in 2013, the Washington-based IMF said today in its World Economic Outlook, raising forecasts made in January from 3.3 percent for 2012 and 4.0 percent for next year. The U.S. will grow 2.1 percent this year and 2.4 percent in 2013, up from 1.8 percent and 2.2 percent in the lender’s January projections.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has widened to 2.29 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 (SPX) has gained 2.5 percent this year, reflecting demand for inflation protection.
The 30-year bond yield may fall toward a seven-week low after breaking below its 100-day moving average of 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 rose one basis points today to 3.14 percent.
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