Bloomberg News

Treasury 10-Year Yields Rise From 2013 Lows Before Sale

April 23, 2013

Treasuries Are Near Most Expensive in 2013 on Outlook for Fed

Traders work in the two-year and five-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago. Photographer: Daniel Acker/Bloomberg

Treasury 10-year yields rose from the lowest level this year before the U.S. is scheduled to sell $35 billion of two-year debt, in the first of three note auctions this week totaling $99 billion.

The benchmark yields fell earlier as reports showed China’s manufacturing is expanding at a slower pace and euro-area output contracted for a 15th consecutive month in April. Yields pared losses as purchases of new U.S. homes rose in March, capping the best quarter for the industry since 2008. European stocks rallied the most in eight months on speculation the European Central Bank will boost monetary accommodation. U.S. equities gained for a third day.

“Equities are higher already today, so it’s tough to say the market’s view of global growth has deteriorated significantly,” Michael Pond, head of global inflation-linked research at Barclays Plc, one of 21 primary dealers that trade with the Federal Reserve.

Benchmark 10-year yields were little changed at 1.70 percent as of 12:01 p.m. in New York, according to Bloomberg Bond Trader data, after reaching 1.64 percent, the lowest level since Dec. 12. The price of the 2 percent note due February 2023 was 102 23/32.

Ten-year yields were as high as 1.73 percent yesterday, versus the 200-day moving average of 1.75 percent. The average is an indicator of momentum.

The Standard & Poor’s 500 Index (SPX) gained 1 percent and the MSCI All-Country World Index (MXWO) of stocks added 1.2 percent.

Notes Auction

The two-year notes scheduled for sale today yielded 0.23 percent in pre-auction trading. The previous two-year auction on March 26 drew bids for 3.27 times the amount of securities available, the lowest level since July 2011.

“Level-wise, these twos are pretty rich,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The auction could tail a little bit because of the levels. The excitement in our market is not in the two-year sector, it’s out the curve.” A tail is the amount of yield in excess of where the security was trading before the auction.

The U.S. is scheduled to sell $35 billion in five-year notes tomorrow and $29 billion in seven-year debt the next day.

Bidding has slowed at Treasury auctions this year, with the $632 billion in debt sales attracting an average of $2.95 in orders to buy per dollar of debt sold, compared with a record $3.15 in 2012, data released by the Treasury and compiled by Bloomberg show.

Economic Data

The preliminary reading of 50.5 for China’s Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics compared with a final 51.6 for March. The figure was also below the median 51.5 estimate in a Bloomberg News survey of 11 analysts. A reading above 50 indicates expansion.

A composite index of activity in the service and manufacturing industries in the 17-nation euro bloc was 46.5 this month, a separate report showed.

“With all the slowing data, the debate continues to be: Is this just a momentary blip or a sign of things to come?” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The home-sales figures were a push at best and at worst a confirmation of a brief slowing in the housing market, that’s all.”

Sales of single-family properties in the U.S. climbed 1.5 percent last month to a 417,000 annual pace from a 411,000 rate in February, Commerce Department figures showed today in Washington. The median estimate of 76 economists surveyed by Bloomberg called for March sales to rise to 416,000.

Relative Value

U.S. gross domestic product expanded at a 3 percent annual rate in the first quarter after growing 0.4 percent in the final three months of 2012, according to the median forecast of economists surveyed by Bloomberg News before a Commerce Department report on April 26.

“People are starting to see Europe take off instead of it being an albatross or inhibiting the U.S., it’s forcing people out,” Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. Treasuries are trading “inverse to equities,” he said.

The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached negative 0.84 percent in the U.S, the lowest level since December. Negative readings indicate investors are willing to accept yields below what’s considered fair value.

Treasury volatility as measured by Bank of America Merrill Lynch’s MOVE index fell to a record 50.58 basis points yesterday, below the previous low of 51 basis points reached in December. The data stretches back to 1988.

The Fed is buying $85 billion of Treasury and mortgage bonds a month to boost the economy by putting downward pressure on borrowing costs, including $937 million of securities maturing between August 2023 and February 2031 today, according to the New York Fed’s website.

Treasuries have returned 0.7 percent this year, according to Bank of America Merrill Lynch indexes. German government bonds have also earned 0.7 percent, the indexes show.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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


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