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Treasuries declined for a second day after European Central Bank President Mario Draghi said the ECB was ready to do whatever it takes to preserve the euro, damping demand for the safety of U.S. assets.
U.S. government debt extended losses after reports showed first-time claims for unemployment insurance payments fell and durable goods orders climbed more than forecast. Longer maturities led losses on concern a slide in U.S. yields to record lows this week will erode demand as investors prepared to bid at a $29 billion sale of seven-year debt today.
“It’s a buy-the-dip opportunity on Treasuries,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “We’re waiting to see some real concrete measures from the ECB -- we need firm action. The fact that we’re off today can only help the seven- year.”
The benchmark 10-year yield rose three basis points, or 0.03 percentage point, to 1.43 percent at 11:29 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2022 fell 9/32, or $2.81 per $1,000 face amount, to 102 29/32. The yield dropped to a record 1.379 percent yesterday.
The 30-year yield climbed three basis points to 2.49 percent after declining to 2.4405 percent, the lowest level since Bloomberg started tracking the securities in 1977.
The U.S. seven-year notes being sold today yielded 0.95 percent in pre-auction trading, poised to draw a rate less than 1 percent for the first time. Investors bid for 2.64 times the amount offered at the previous sale on June 28, the least since October.
“There won’t be a problem digesting the supply,” said Milstein.
Seven-year notes have returned 1.5 percent this month, the same as that for the broader Treasury market, according to Bank of America Merrill Lynch indexes.
The Treasury sold $35 billion in two-year debt July 24 at an all-time auction low yield of 0.220 percent, drawing almost record demand. It followed that yesterday with the sale of $35 billion in five-year notes, at a yield of 0.584 percent, also a record. The Treasury will sell a total of $99 billion in debt this week.
Ten-year yields will rise to 1.86 percent by year-end, according to a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said during a speech in London today. “And believe me, it will be enough.”
His comments came as Spanish policy makers call on the ECB to do more to fight a renewed bout of financial turmoil that pushed the yields on the country’s bonds to the highest level in the euro era this week.
“Draghi’s comments are contributing to the risk-on trade” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trades with the Federal Reserve “It’s putting in support for perhaps resuming buying peripheral debt.”
The euro jumped against the dollar by the most in almost a month, climbing as much as 1.4 percent.
Treasuries extended losses after applications for jobless benefits decreased by 35,000 in the week ended July 21 to 353,000, Labor Department figures showed today, extending the period of volatility typically seen in July. Economists forecast 380,000 claims, according to the median estimate in a Bloomberg News survey.
“The claims trend is probably going to bounce around in the 370-to-390 range for a considerable period,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., a primary dealer.
Orders for U.S. durable goods climbed 1.6 percent for a second month, another report showed. The median forecast of economists surveyed by Bloomberg News called for a 0.3 percent gain.
Benchmark 10-year Treasury yields dropped to a record yesterday as signs of a global economic slowdown boosted demand for the relative safety of U.S. government debt.
The term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, dropped to negative 1.02 percent on July 24, the most expensive level on record. It was minus 0.98 today. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
The extra yield investors demand to hold 30-year Treasuries instead of 10-year notes shrank to 1.04 percentage points today from this year’s high of 1.23 percentage points set in May. The average over the past decade is 0.7 percentage point.
The U.S. central bank purchased $1.8 billion of Treasuries due from February 2036 to May 2042 today as part of the central bank’s plan, known as Operation Twist, to put downward pressure on borrowing costs by swapping short-term Treasuries in its holdings for longer maturities.
The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, seeking to cap borrowing costs. Policy makers next meet on July 31 and Aug. 1. They have kept interest rates in a range between zero and 0.25 percent since December 2008.
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