Treasuries advanced for the first time in five days on speculation euro-area finance ministers meeting will struggle to agree on a plan to clear an aid payment to Greece, underpinning demand for the safest assets.
The benchmark 10-year yield fell from the highest level in two weeks after pro-independence parties in Spain’s Catalonia won a majority in a regional vote, strengthening a drive for a referendum on secession. Euro-area finance chiefs are meeting in Brussels today, less than a week after an all-night meeting failed to yield agreement on Greece. At stake is the continuation of a three-year mission to return Greece to financial health.
“There’s still an outside shot that the Greece situation is not totally done yet,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “There’s still the aid package to work out. It’s very difficult to trade this market. We are range bound.”
The 10-year yield fell three basis points, or 0.03 percentage point, to 1.66 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 rose 1/4, or $2.50 per $1,000 face amount, to 99 21/32. The yield climbed to 1.70 percent on Nov. 23, the highest level since Nov. 7.
The Treasury 30-year yield declined three basis points to 2.80 percent after rising to 2.84 percent on Nov. 21, the most since Nov. 8.
Treasury trading volume dropped today to $150 billion, compared with the 2012 daily average of $240 billion, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt.
Hedge-fund managers and other large speculators increased net-long position in 10-year note futures in the week ending Nov. 20, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 161,413 contracts on the Chicago Board of Trade, up by 2,894 contracts, or 2 percent, from a week earlier.
Large traders held a net-long position in Treasury-bond futures. Speculative long positions, or bets prices will rise outnumbered short positions by 29,771 contracts, versus 16,912 contracts the previous week.
Treasuries traded at the most expensive level in a week. The 10-year term premium, a model created by Fed economists that includes expectations for interest rates, growth and inflation was at negative 0.90 percent, the most expensive level since Nov. 19. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Investors in U.S. government securities have earned 0.2 percent this month through Nov. 23, according to Bank of America Merrill Lynch indexes. The debt has returned 2.3 percent this year, compared with 9.8 percent in 2011.
Government debt was also boosted as some investors bought debt to increase the duration of their portfolios to match benchmarks at the end of the month, such as the Barclays Plc U.S. Treasury Index. Duration measures price sensitivity to changes in yield, and is partly a function of maturity.
The Barclays U.S. Treasury index is projected to extend by 0.07 year for November, the most since extending by 0.08 year in August, according to the firm.
Volatility in U.S. government bonds dropped to the lowest in more than five years on Nov. 23. Bank of America Merrill Lynch’s MOVE index, which measures price swings for Treasuries based on options, fell to 53.7, matching the least since May 2007.
“The Federal Reserve has its foot on things,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The Fed’s activity is squelching volatility.”
The Fed purchased $1.86 billion in Treasuries maturing from February 2036 to November 2042 today as part of its Operation Twist program to replace shorter-term securities with longer- term Treasuries.
The central bank is scheduled to conduct six purchase operations this week as part the program to strengthen the economic recovery. It will conduct two separate operations on Nov. 28 of securities maturing from February 2036 to November 2042 and November 2018 to November 2020. The program is scheduled to end in December.
The U.S. will sell $99 billion in notes this week, starting with $35 billion in two-year debt tomorrow. The U.S. is scheduled to sell an equal amount of five-year notes Nov. 28 and $29 billion of seven-year securities on Nov. 29.
“Auctions have not proven to be a major challenge at this stage of the game,” Ader of CRT said.
The previous sale of two-year notes on Oct. 23 drew a yield of 0.295 percent, the highest yield in an auction of the maturity since June. The securities attracted record demand from direct bidders, a group of investors that includes pension funds and insurance companies. They purchased 38 percent of the notes, compared with a 12.2 percent average at the previous 10 auctions.
The two-year note yielded 0.266 percent today. The security yielded 0.275 percent in when-issued trading.
A breakthrough in the European talks depends on coming up with 10 billion euros ($13 billion) to fill the shortfall that emerged when Greece this month got two more years to meet deficit-reduction targets.
Catalan President Artur Mas, who called early elections in the region to force the debate on independence, won 50 of the 135 seats in the regional assembly for his Convergencia i Unio party, down from 62. The separatist Catalan Republican Left, known as the ERC, more than doubled its seats to 21 from 10. Two smaller parties that also back a plebiscite secured 16 seats.
Mas has pledged to hold a referendum within four years. In contrast, the ERC would be willing to declare independence unilaterally in 2014.
The vote in Spain “continues to highlight how difficult it is to pull together political majorities in the troubled sovereigns in Europe because the issues are so thorny,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee.
The U.S. Commerce Department will say durable-goods orders, excluding transportation equipment, dropped 0.5 percent last month after increasing 2 percent in September, according a Bloomberg News survey of economists before the figures are released tomorrow.
Treasuries fell last week on speculation President Barack Obama and lawmakers will reach an agreement to avert the more than $600 billion in tax increases and government spending cuts scheduled for the start of 2013 unless Congress acts.
The combination of Fed efforts to stimulate the economy by buying bonds and the potential slowdown should politicians fail to avert the fiscal cliff has made Treasuries the debt that money managers have to own.
“Treasuries offer little real value, but in the short term, it is just hard to be a bear,” said Donald Ellenberger, who manages $10 billion for Federated Investors Inc. (FII:US) in Pittsburgh, in a Nov. 19 telephone interview. The company has moved from significantly “underweight” Treasuries compared with benchmark performance measures to adding the securities. “The fiscal cliff is a big deal, and the Fed is determined to keep rates low.”
Ten-year yields will end the year at 1.74 percent, according to Bloomberg surveys. They will climb to 1.85 percent in the first quarter of next year, the predictions show.
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