Bloomberg News

Treasuries Fall for First Time in 3 Days After Reports

August 29, 2012

Treasuries fell as reports showing the U.S. economy expanded more than previously estimated and that pending home sales rose reduced speculation the Federal Reserve will announce another round of bond purchases.

U.S. bonds declined for the first time in three days even after the U.S. sold $35 billion of five-year notes at a lower- than-forecast yield. The government will auction $29 billion in seven-year debt tomorrow in the final of three note sales this week totaling $99 billion. Treasuries gained earlier in the week before Chairman Ben S. Bernanke speaks on Aug. 31 at an economics conference in Jackson Hole, Wyoming.

“At the end of the day, the market is waiting for Bernanke,” Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York, said in a telephone interview. “The auction came and was well received. As we move out the curve, we should see stronger demand tomorrow.”

The benchmark 10-year note yield increased two basis points, or 0.02 percentage point, to 1.65 percent at 3:54 p.m. in New York, according to Bloomberg Bond Trader Prices. The price of the 1.625 percent security due in August 2022 dropped 6/32, or $1.88 per $1,000 face amount, to 99 23/32.

Thirty-year yields rose two basis points to 2.77 percent, while the yield on the current five-year security was little changed at 0.68 percent after touching 0.7 percent earlier.

Note Auction

The five-year notes sold today drew a yield of 0.708 percent, compared with a forecast of 0.716 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.92, matching the average for the past 10 sales.

Five-year yields reached a record auction low of 0.584 percent at the last offering on July 25.

Indirect bidders, an investor class that includes foreign central banks, purchased 39.7 percent of the notes today, compared with an average of 44 percent at the past 10 offerings.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11 percent, the highest level since the March offering. The average at the past 10 auctions was 10 percent.

Five-year notes have returned 1.8 percent this year, compared with a 2.2 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes. The five- year securities rose 9.2 percent in 2011, versus a 9.8 percent advance by Treasuries overall.

Yesterday’s sale of $35 billion in two-year debt yielded 0.273 percent.

More Costly

Treasuries traded at almost the most expensive level in three weeks, according to the term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation. The gauge slipped to negative 0.877 percent today, from negative 0.878 percent yesterday, the most costly closing level since Aug. 6.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is positive 0.46 percent.

Treasuries remained lower as the Fed said in its Beige Book regional business survey that the U.S. economy continued to expand “gradually” in July and early August as improvement in housing and retail sales helped outweigh weakness in manufacturing.

Pending home sales in the U.S. climbed 2.4 percent in July, more than double the forecast in a Bloomberg News survey, data from the National Association of Realtors showed. Sales dropped 1.4 percent in June.

‘Big Factor’

“Housing is such a big factor in the economy that when you get sales up a little bit, it’s seen as a positive for the economy,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 21 primary dealers that are obliged to bid at the Treasury’s debt auctions.

The U.S. economy expanded at a 1.7 percent annualized pace in the second quarter, Commerce Department data showed today, more than the government’s initial 1.5 percent estimate a month ago. Gross domestic product grew 2 percent in the first quarter.

Treasuries gained yesterday on speculation the Fed, which meets Sept. 12-13, is planning to announce new debt purchases to spur economic growth. It bought $2.3 trillion of assets in two rounds of the stimulus strategy called quantitative easing from 2008 to 2011.

QE ‘Likely’

“Quantitative easing by the Federal Reserve is likely to be implemented, despite our view that the U.S. economy is stabilizing and is not likely to fall into recession,” wrote Rick Rieder, chief investment officer of fundamental fixed income at New York-based BlackRock Inc., in the firm’s August fixed-income report. “The Fed isn’t anywhere close to achieving its mandate of healthy labor markets.”

A Labor Department report Sept. 7 is forecast to show U.S. employers added 118,000 jobs in August, down from 163,000 in July, according to economists in a Bloomberg News survey.

Bernanke may outline his views on stimulus in his speech this week at the Kansas City Fed’s conference. Minutes of the Fed’s July 31-Aug. 1 meeting released last week showed many policy makers said more stimulus probably will be needed soon unless the economy shows signs of a durable pickup.

The Fed bought $4.75 billion of Treasuries today due from August 2018 to August 2020. The purchase is part of an effort called Operation Twist in which it is swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term interest rates.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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