Bloomberg News

Treasuries Fall Before U.S. Sells $32 Billion of Notes

June 12, 2012

Treasuries fell as the U.S. prepared to sell $32 billion in three-year notes and traders speculated Federal Reserve policy makers may increase stimulus to keep the economic recovery from faltering.

Bonds briefly pared losses after Fitch Ratings cut the credit ratings of 18 Spanish banks, renewing the refuge appeal of U.S. government securities. The Treasury will sell $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds the next day.

“Supply is probably the biggest factor in the market right now,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Fed. “That’s why we’ve moved to higher yields. People think the whole crisis will get worse before it gets better. I don’t see any optimism.”

The U.S. 10-year yield climbed four basis points, or 0.04 percentage point, to 1.63 percent at 12:34 p.m. New York time, according to Bloomberg Bond Trader data prices. The 1.75 percent note due May 2022 dropped 11/32, or $3.44 per $1,000-face amount, to 101 4/32. U.S. 30-year yields also rose four basis points, to 2.74 percent.

U.S. 10-year yields fell from 2.30 percent on April 4 to a record-low 1.44 percent on June 1 as deadlocked Greek elections deepened euro-area turmoil. Voters in Greece will go to the polls again on June 17.

’Short’ Bets

“It’s not clear if it will be a strong risk-on trade,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We were weaker overnight on the ongoing process of calibrating for the implications of the Spanish bailout.”

Treasuries investors raised bets the price of the securities will drop and remained “net short” for a second week, according to a survey by JPMorgan Chase & Co.

The proportion of net shorts was unchanged at six percentage points in the week ending June 11 as outright shorts rose to 19 percent from 17 percent the previous week and outright longs rose to 13 percent from 11 percent. A short position is a bet that an asset will decrease in value, while a long is a wager it will increase.

The number of neutrals dropped to 68 percent from 72 percent.

A valuation measure showed U.S. government bonds are at almost the most expensive levels ever. The term premium, a model created by economists at the Federal Reserve, was at negative 0.85 percent after reaching negative 0.94 percent, the record, on June 1. The average over the past year is negative 0.46. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Debt Sales

This week’s auctions will “help offset any flight-to- Treasury momentum ahead of the Greek elections,” Patrick Gouraud, a fixed-income strategist at Societe Generale SA in New York, wrote in a note dated today.

The three-year notes on offer today yielded 0.37 percent in pre-auction trading, compared with 0.36 percent at the previous offering on May 8. Investors bid for 3.65 times the amount for sale last month, versus an average of 3.38 for the previous 10 auctions.

U.S. government securities gained 3.2 percent this quarter through yesterday, compared with a 1.9 percent return on the nation’s corporate debt, Bank of America Merrill Lynch data showed.

Fitch downgraded the long-term issuer default ratings on Spain’s banks, citing concern about the potential for loan portfolio to deteriorate further.

Pimco Buys

The Fed purchased $1.876 billion of Treasuries due from February 2036 to August 2041 today under its program known as Operation Twist, which aims to replace holdings of shorter-term securities with longer-term bonds, according to the Fed Bank of New York’s website.

The central bank bought $2.3 trillion of bonds in two rounds of so-called quantitative easing, or QE, from December 2008 to June 2011 to cap borrowing costs and stimulate the economy.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., raised the Newport Beach, California-based company’s holdings of Treasuries in May.

The company increased the proportion of U.S. government and Treasury debt in its $260 billion Total Return Fund (PTTRX:US) to 35 percent from 31 percent of its asset holdings in April, it said on its website. Holdings of mortgages dropped to 52 percent from 53 percent.

Fed Bank of Chicago President Charles Evans said he would support a variety of measures to generate faster job growth, underscoring his preference for more stimulus.

Fed Stimulus

“I’ve been in favor of pretty much any accommodative policy I’ve heard about,” Evans, who doesn’t vote on the Federal Open Market Committee this year, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu.

Fed Bank of Atlanta President Dennis Lockhart, who does have an FOMC vote, said yesterday recent U.S. economic reports indicate the recovery may be losing momentum. Lockhart reiterated his view that policy makers need to take further action to stimulate the economy if it becomes clear growth is slowing.

“The market is pricing in some action from the Fed, and the focus has clearly shifted to QE,” Eric Green, head of rate strategy in New York at TD Securities Inc., wrote in a note to clients today.

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, or TIPS, which represents traders’ expectations for the rate of inflation over the life of the bonds, was at 2.13 percentage points. It touched a 2012 low of 1.9 percentage points on Jan. 3 and a high of 2.45 percentage points on March 20. The five-year average is 2.02 percentage points.

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

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

June 12 (Bloomberg) -- Bonnie Baha, head of global developed credit at DoubleLine Capital LP, talks about investment strategy for global bond markets. She speaks with Sara Eisen and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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