Bloomberg News

Treasuries Rally Falters After Housing Market Shows Growth

September 19, 2013

Treasuries dropped a day after the biggest rally in almost two years as strengthening economic conditions reminded investors that the Federal Reserve’s next move will probably be to reduce monetary stimulus.

Yields (USGG10YR) on benchmark 10-year notes rose from the more than one-month low reached yesterday as reports showed sales of previously owned homes rose to the highest level in more than six years and an index measuring economic conditions in the Philadelphia region topped forecasts. Fed Chairman Ben S. Bernanke unexpectedly kept the pace of bond purchases by the central bank unchanged yesterday, saying policy makers are concerned that rapid tightening of financial conditions in recent months will slow growth.

Treasuries are not “a screaming buy right now,” Donald Quigley, senior portfolio manager at New York at Aberdeen Asset Management Inc., said at the firm’s global fixed-income round table. “It’s really hard to say that the 10-year at 2.73 right now is particularly attractive.”

The 10-year yield rose six basis points or 0.06 percentage point to 2.75 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.5 percent note maturing in August 2023 dropped 17/32, or, $5.31 per $1,000 face value, to 97 26/32. The yield slid 16 basis points yesterday, the biggest decline since Oct. 31, 2011.

Direct Demand

The U.S. sold $13 billion of 10-year Treasury Inflation Protected Securities at a yield of 0.5 percent, higher than the 0.488 percent forecast in a survey of six of the Fed’s 21 primary dealers, who are required to bid at Treasury auctions. The sale attracted the least demand since 2009 from a group of investors that includes pension funds and insurers, with U.S. consumer prices rising less than forecast.

Direct bidders, non-primary-dealer investors that place bids directly with the Treasury, bought 1.9 percent of the TIPS, the least since October 2009. The average at the past 10 sales is 12 percent.

Bernanke has said low inflation could cause the recovery to bog down by inhibiting capital investment and increasing the risk of “outright deflation,” a broad-based decline in prices.

“Direct bidders were very passive, and them not showing up had a negative impact on the auction,” said Tom Simons, an economist in New York at Jefferies LLC, a primary dealer. “In light of an uncertain monetary policy environment, the Fed’s growth concerns and an inflation environment that is very weak, without sighs of even burgeoning inflation, the road remains tough for TIPS.”

Inflation Adjustment

The consumer-price index increased 0.1 percent in August, the least in three months, Labor Department figures showed Sept. 17. The median forecast in a Bloomberg survey of 87 economists called for a 0.2 percent gain. Consumer prices increased 1.5 percent in the 12 months ended in August after a 2 percent year-over-year gain the prior month.

Inflation-indexed securities rise or fall in value tracking changes in the consumer price index calculated by the Labor Department. Inflation adjustments will be added to the notes’ principal and interest coupon and be payable at maturity.

Demand was weaker than at the last auction, judging by the bid-to-cover ratio, which compares the number of bids with the amount of securities sold. The ratio was 2.38, compared with 2.44 at the previous sale. The bid-to-cover ratio was the lowest since 2.36 in September 2012.

Break-Even Rate

Indirect bidders, a group that includes foreign central banks, bought 53.8 percent of the amount sold, compared with 57.7 percent in the prior auction. Primary dealers bought 44.6 percent, compared with 35.4 in the previous sale. Direct bidders purchased 1.6 percent.

The difference between yields on 10-year notes and similar-maturity TIPS, a gauge of expectations for consumer prices over the life of the debt, rose one basis points to 2.22 percentage points, after earlier reaching the widest since Aug. 14.

The Fed yesterday left unchanged its outlook that its target interest rate will remain near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.

The U.S. will sell $33 billion in two-year notes on Sept. 24, a drop of $1 billion from the sale of the securities last month, the Treasury announced. It will also sell the next day $35 billion in five-year securities that will be considered an additional issue of the outstanding seven-year notes issued Sept. 30, 2011. The U.S. will sell $29 billion in seven-year debt on Sept. 26.

Home Sales

Purchases of previously owned homes climbed 1.7 percent to a 5.48 million annual rate, the highest since February 2007, figures from the National Association of Realtors showed. The median forecast of 79 economists in a Bloomberg survey called for a drop to 5.25 million.

The Federal Reserve Bank of Philadelphia’s general economic index rose to 22.3 in September from 9.3 a month earlier. Readings greater than zero signal growth in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware. The median forecast of 57 economists surveyed by Bloomberg called for a reading of 10.3. Estimates ranged from 5 to 16.6.

“The housing market is showing a lot more resilience than the Fed is giving it credit for,” said Jacob Oubina, a senior U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets unit, a primary dealer. “The market continues to heal, albeit at a gradual pace. Bernanke was extremely dovish yesterday. Today’s data was strong across the board.”

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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