Bloomberg News

Treasuries Gain Amid Low-Rate Prospects as Demand Climbs at Sale

December 17, 2013

Treasuries rose amid speculation the absence of inflation will allow the Federal Reserve to reiterate at the conclusion of a two-day meeting tomorrow that borrowing rates will remain low even if policy makers slow bond purchases.

The government’s sale of $32 billion of two-year notes drew the strongest demand since January as investors bet rates will remain low. Treasury notes due in five to 10 years led gains as traders weighed whether the Fed will begin reducing $85 billion in monthly bond buying this week or at its January or March meetings.

“You are seeing a little pullback in yields; it’s all about positioning in front of the Fed,” said Dan Greenhaus, chief global strategist in New York at BTIG LLC. “No one is exactly sure what’s going to happen tomorrow.”

Five-year note yields dropped four basis points, or 0.04 percentage point, to 1.5 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 1.25 percent security due in November 2018 gained 6/32, or $1.88 per $1,000 face amount, to 98 27/32.

Benchmark 10-year (USGG10YR) yields sank four basis points to 2.84 percent, while the current two-year note yield declined one basis point to 0.32 percent.

The U.S. consumer-price index was unchanged in November, following a 0.1 percent decrease in October, a Labor Department report showed today in Washington. Economists surveyed by Bloomberg called for a 0.1 percent advance.

‘Balanced Chance’

Trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 28 percent to $248 billion, from $194 billion yesterday. The gauge has averaged $311 billion this year.

A gauge of Treasuries volatility, the Bank of America Merrill Lynch MOVE index, declined to 68.46 from 69.92 yesterday. The average this year is 71.49.

The Fed will probably start curtailing bond purchases this week, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, an increase from 17 percent in a Nov. 8 survey. Twenty-six percent forecast January and 40 percent said March.

“There’s a balanced chance this happens in December or January,” Carlos Pro, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that trade with the U.S. central bank, said of purchase reductions. “They are basically biased to slow down the pace of purchases. If they’re going to slow down on that front, they need to replace that with another tool that keeps front-end rates anchored. The key thing is what they do about forward guidance.”

The Fed buys Treasury and mortgage debt to fuel growth by putting downward pressure on borrowing costs.

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said there’s about a 60 percent chance the Fed will announce a reduction in purchases tomorrow.

Policy Package

When the Fed does taper, policy makers will offer a package of policies, which may include a change in how much they pay banks on excess reserves, thresholds for changing programs and forward guidance on policy, the Newport Beach, California-based asset manager said an in interview on Bloomberg Television.

“The idea is that the Fed is going to offer the market a package, and the market is going to be reacting to the package and not just one element, which is the taper,” said El-Erian of Pimco, which oversees $1.97 trillion as the world’s largest manager of bond funds.

The Fed has kept its benchmark interest-rate target for overnight loans between banks at zero to 0.25 percent for five years. Fed Chairman Ben S. Bernanke said last month the rate will probably stay low long after bond buying ends.

The odds of an increase in the rate by January 2015 are about 15 percent, based on data compiled by Bloomberg from futures contracts.

Little Urgency

Slowing inflation has cut any urgency for the Fed to raise interest rates. The central bank has said it will maintain the target rate at least as long as unemployment is above 6.5 percent and inflation projections are below 2.5 percent. The jobless rate was 7 percent last month, data on Dec. 6 showed.

The two-year notes sold today drew a yield of 0.345 percent, the lowest level since September. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.77, the highest in 11 months, compared with an average of 3.26 for the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 21.5 percent of the notes, the least since August. That compared with an average of 24.6 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 30.2 percent of the notes at the sale, compared with an average of 22.4 percent for the past 10 auctions.

Note Sales

The Treasury will sell $35 billion of five-year securities tomorrow. Its note offerings this week will also include $29 billion of seven-year notes and $16 billion of five-year Treasury Inflation Protected Securities on Dec. 19.

Thirty-year bond yields fell today from 3.92 percent, the highest since Dec. 6, to 3.87 percent after the Fed bought $1.58 billion of securities due from May 2038 to February 2043 as part of its asset-purchase program. A total of $5.22 billion of the securities were offered for sale.

“The buyback was kind of positive,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “The market is probably 50-50 priced for tapering.”

Investors in Treasuries were short for the third straight week, betting that the prices of the securities will drop, according to a survey by JPMorgan Chase & Co.

The proportion of net shorts was at five percentage points in the week ended yesterday, according to JPMorgan. The percent of outright shorts, or bets the securities will drop in value, slipped to 20 percent, from 21 percent the previous week, the survey said. The percent of outright longs rose to 15 percent, from 13, the survey reported.

Investors reduced neutral bets to 65 percent, from 66 percent, the survey said.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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


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