Treasury 30-year bonds rose for the first time in three days, reversing earlier losses, as investors bet yields at 14-month highs offered enough of a premium amid speculation the Federal Reserve will slow asset purchases.
Yields had reached the highest since April 2012 on concern this month’s rise would prompt investors to sell even more government debt as a hedge against losses on mortgage bonds. Stocks and commodities tumbled, stoking the refuge appeal of Treasuries, as concern increased that central banks are pulling back on stimulus measures and low financing. Investors snapped up three-year notes after a lackluster auction.
“This large selloff in the bond market has provided people with the opportunity to get into long bonds, and they’re taking it,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the Fed.
The 30-year bond yield dropped six basis points, or 0.06 percentage point, to 3.31 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It rose earlier to 3.43 percent, the highest since April 2012. The price of the 2.875 percent security maturing May 2043 rose 31/32, or $9.69 per $1,000 face value, to 91 22/32.
Ten-year note yields declined three basis points to 2.19 percent after increasing earlier to 2.29 percent, also the highest since April 2012.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index was at 82.34, after rising yesterday to 84.75, the highest level in almost a year. It has averaged 62.4 over the past 12 months.
Trading volume handled by ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased 48 percent to $532 billion, from $359 billion on June 10. Volume surged to $662 billion on May 22, the highest level in data going back to 2004, according to ICAP.
The 30-year Treasury bond extended gains as stocks and commodities fell, with the Standard & Poor’s 500 Index sliding 1 percent and S&P’s GSCI Index of raw materials losing 0.7 percent. The yen strengthened versus the dollar as the decline in U.S. yields damped the allure of the greenback, and as Bank of Japan Governor Haruhiko Kuroda left a lending program unchanged, stoking concern central banks are growing reluctant to add more stimulus.
“Within the last several trading sessions there’s been a breakdown of the traditional risk-on, risk-off dynamic that we’ve seen in place for the last several quarters,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “What we saw overnight was a sell-stocks, sell-bonds dynamic. Treasuries seem to have once again reestablished themselves as the flight-to-quality asset.”
Bonds also gained amid inflation that’s below the Fed’s 2 percent target rate. The U.S. personal consumption expenditure deflator, the Fed’s preferred gauge of inflation, rose 0.7 percent in April from a year earlier, the smallest increase since 2009.
Treasuries weakened just after the U.S. sold $32 billion of three-year notes at a yield of 0.581 percent, the highest since July 2011. A Bloomberg News survey of traders before the auction had forecast a yield of 0.575 percent.
The amount of bids at the offering relative to debt sold, a gauge of demand known as the bid-to-cover ratio, was 2.95, the weakest since December 2010.
Demand for Treasuries at auction has slackened amid signs of improvement with the U.S. economy. Investors have bid $2.98 for each dollar of debt sold at the U.S. government’s $937 billion in Treasury notes and bonds sold at auction this year compared with of $3.15 set in 2012, according to Treasury data compiled by Bloomberg.
The ratio is still the fourth-highest since at least 1994, following 3.04 in 2011 and 2.99 in 2010. It was 2.50 in 2009.
At today’s auction, primary dealers purchased 58.4 percent of the notes, versus an average of 53.9 percent at the past 10 auctions.
Indirect bidders, a class of investors that includes foreign central banks, bought 33.1 percent of the offering, compared with 30.7 percent at last month’s sale. The average at the past 10 offerings was 25.9 percent. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.4 percent, the fewest since last August. The average at the past 10 auctions was 19.9 percent.
The U.S. will auction $21 billion in 10-year notes tomorrow and $13 billion in 30-year bonds on June 13.
Ten-year note yields climbed 46 basis points in May amid increasing speculation that the Fed, the largest holder of Treasuries with $1.89 trillion, may begin to scale back its bond buying. It was the biggest jump since a 50 basis-point advance in December 2010. The central bank has increased its holdings of Treasuries by $234.4 billion in 2013.
The Fed is purchasing $45 billion of Treasuries and $40 billion of mortgage securities each month to put downward pressure on borrowing costs in its third round of quantitative-easing stimulus since 2008. It bought $1.38 billion of Treasury Inflation Protected Securities today maturing from February 2041 to February 2043.
The central bank will reduce its purchases to $65 billion a month at its October meeting, according to the median estimate in a Bloomberg survey of economists last week.
“Some investors are starting to step in here” with yields at long-time highs, said Justin Lederer, an interest rate strategist at the primary dealer Cantor Fitzgerald LP in New York. “There’s a little anxiety about 10s and bonds. The market is a little volatile, a little nervous.”
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