Treasuries dropped, pushing 10-year yields to the highest level in a month, as better-than-estimated corporate earnings damped the allure of Treasuries and sent yields higher at a $32 billion sale of three-year debt.
The securities, which mature in August 2015, drew a yield of 0.370 percent, compared with the average forecast of 0.361 in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. The U.S. will sell $24 billion of 10-year notes tomorrow, and $16 billion of 30-year bonds on Aug. 9.
“It’s a risk-on, risk-off type of trade,” said Brian Edmonds, head of interest rates at primary dealer Cantor Fitzgerald LP in an interview on Bloomberg Television with Adam Johnson. “Treasuries have been the main loser in that trade. I don’t see a move to much higher rates.”
The benchmark 10-year yield rose six basis points, or 0.06 percentage point, to 1.63 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2022 dropped 18/32, or $5.63 per $1,000 face amount, to 101 3/32. The yield reached the highest level since July 2. It touched a record 1.379 percent on July 25.
The yield on the current three-year note rose four basis points to 0.36 percent.
The Standard & Poor’s 500 Index gained for a third straight day.
“It was an adequate auction,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Stocks are doing better and it puts more pressure on Treasuries. Things are not as bad as everyone once predicted. It traps the Fed into doing nothing now.”
Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased to $235 billion, the highest since Aug. 3. Trading has averaged $241 billion this year.
Volatility rose to 73.9 basis points, just below the 2012 average of 75 basis points, according to Bank of America Merrill Lynch’s MOVE index. It dropped to a five-year low of 56.7 basis points on May 7 and touched a 2012 high of 95.4 basis points on June 15. This compares with a record high of 264.6 basis points in October 2008 as the financial crisis intensified. The index measures price swings based on options.
Fed Bank of Boston President Eric Rosengren said the inflationary effects of the central bank’s securities-purchase programs are a real concern, in an interview with CNBC.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, rose to 2.21 percentage points, touching the highest since May. The average during the past decade is 2.15 percentage points.
The difference between yields on five-year notes and similar-maturity TIPS rose to 1.95 percentage points, the highest since May 11. The average during the past decade is 1.94 percentage points.
At today’s sale of notes, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.51, the lowest since April and compared with an average of 3.49 for the past 10 sales.
Indirect bidders, an investor class that includes foreign central banks, purchased 29.7 percent of the notes, compared with an average of 34.9 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.4 percent of the notes at the sale, the lowest since April and compared with an average of 9.9 percent for the past 10 auctions.
Three-year notes have returned 0.4 percent this year, compared with a 2.4 percent gain for Treasuries overall, according to Bank of America Merrill Lynch indexes. The three- year securities returned 3.4 percent in 2011, while Treasuries overall gained 9.8 percent.
The yield on the 10-year note is poised to climb to 1.67 percent with the break today of 1.596 percent, MacNeil Curry, head of foreign-exchange and interest rates technical strategy in New York at Bank of America Merrill Lynch, said in an interview. A break of 1.67 percent means an end to the four month bull-run, he said.
The firm is still bullish, calling for 1.24 percent on the 10-year security, but a break of 1.67 percent would “force us to abandon this view,” he wrote in a report today. The “1.67 is the line in the sand,” he said in the interview. “If it breaks, I’m going to go back to the drawing board.”
On the 30-year bond, “a sustained break of 2.692 percent opens a move towards 2.84 percent,” Curry wrote. “A move through indicates a medium-term turn in trend. Until then, we remain bullish for 2.07 percent.”
Investor appetite for the safety of Treasuries ebbed this month when a U.S. employment report for July showed the nation added 163,000 jobs, more than the 100,000 projected by economists surveyed by Bloomberg News. It was the first time since the report for February, released March 9, that the number of jobs created exceeded the consensus forecast.
The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing to cap borrowing costs. It’s now in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long- term borrowing costs.
The Fed purchased $4.5 billion of Treasuries due from August 2018 to May 2020 today as part of the program, according to the Fed Bank of New York website.
To contact the reporter on this story: Susanne Walker in New York at firstname.lastname@example.org; Daniel Kruger in New York at email@example.com
To contact the editor responsible for this story: Dave Liedtka at firstname.lastname@example.org