Bloomberg News

U.S. 10-Year Yield at Almost 1-Week High Before Note, Bond Sales

August 06, 2012

Treasury 10-year note yields traded at almost a one-week high before the U.S. auctions $32 billion in three-year debt tomorrow, the first of three sales of notes and bonds this week totaling $72 billion.

U.S. debt rose earlier, snapping a decline from last week, amid speculation that central banks will take steps to stimulate growth and as political strains in Europe threaten to worsen the region’s debt crisis. Treasuries returned 6.8 percent during the past 12 months, according to Bank of America Merrill Lynch indexes, one year after Standard & Poor’s Corp. downgraded the U.S. Yields rose Aug. 3 after a report showed U.S. jobs growth exceeded forecasts.

“The market gets more and more comfortable that it will get taken down without too many problems because that’s what’s been going on the past few months,” Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, said in a telephone interview, referring to this week’s auctions. “I had a strong view that we were oversold on Friday.”

The benchmark 10-year yield was little changed at 1.57 percent at 5:00 p.m. in New York, according to Bloomberg Bond Trader prices, almost the highest since July 27. The 1.75 percent note maturing in May 2022 fell 1/32, or 31 cents per $1,000 face amount, to 101 21/32.

The yield fell as much as three basis points today and touched a record 1.379 percent on July 25.

Interest Bill

The U.S. has spent about $323.1 billion on interest expense on its $15.9 trillion of debt this fiscal year, which ends Sept. 30, compared with $412.5 billion during the same span in 2011, according to data compiled by Bloomberg.

Treasuries have outperformed most top-ranked sovereigns as global investors have flocked to the nation’s debt since S&P on Aug. 5, 2011 downgraded the U.S. to AA+ from AAA.

Stocks rose and the euro climbed as German Chancellor Angela Merkel’s government backed the European Central Bank’s bond-buying plan. The Federal Reserve said Aug. 1 after a policy meeting it “will provide additional accommodation as needed” to spur growth and employment, while it refrained from expanding monetary stimulation this month.

The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, or QE, to cap borrowing costs. The Federal Open Market Committee said on Aug. 1 it will pump fresh stimulus if necessary into the weakening economic expansion to boost growth and reduce an unemployment rate that’s been stuck at 8 percent or higher for more than three years.

Fed Role

“Seems like a QE trade,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Fed, said in a telephone interview. “That’s the kind of trades that occurred before QE the first and second time, where you get risk assets up and a bit of a rally in Treasuries.”

The Fed bought $4.6 billion of Treasuries due from August 2020 to May 2022 today, according to the Fed Bank of New York’s website. The purchases are part of Chairman Ben S. Bernanke’s plan to contain borrowing costs by swapping short-term Treasuries in the central bank’s holdings for longer maturities.

The 10-year Treasury yield may be capped by its 50-day moving average currently at 1.56 percent, according to data compiled by Bloomberg. The yield closed above the moving average on Aug. 3 for the first time in four months.

The Treasury will sell $24 billion of 10-year notes Aug. 8 and $16 billion of 30-year bonds the next day.

Headline Trade

“On a relatively slow day, the back and forth of competing European headlines may once again drive Treasury prices,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We’ll probably look for supply to create a concession.”

Hedge-fund managers and other large speculators increased their net-long position in two-year note futures to a record level in the week ending July 31, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 234,808 contracts on the Chicago Board of Trade. The previous net-long high was 221,904 contract in the week ended May 6, 2011.

Italian Prime Minister Mario Monti, in an interview with Germany’s Der Spiegel magazine published yesterday, said that disagreements within the 17-nation euro area are detracting from the policy response to the debt crisis and undermining the future of the European Union.

“The tensions that have accompanied the euro zone in the past years are already showing signs of a psychological dissolution of Europe,” Monti told Der Spiegel. While he backed the ECB’s willingness to address “severe malfunctioning” in the government-bond market, Monti said the problems “have to be solved quickly now so that there’s no further uncertainty about the euro zone’s ability to overcome the crisis.”

Treasury 10-year note yields will end the year at 1.88 percent, according to the median estimate in a Bloomberg News survey of analysts.

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; 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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