Treasury 30-year debt fell, pushing yields up from almost the lowest this year, as the government prepared to sell $66 billion of notes and bonds this week.
U.S. notes pared losses as stock markets dropped and crude oil declined below $100 a barrel. The government will auction $32 billion of three-year securities tomorrow, $21 billion of 10-year debt on the following day and $13 billion of 30-year bonds on June 9.
“The 30-year bond has come under a lot of pressure in front of supply,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of 20 primary dealers that trade directly with Federal Reserve. “People are more concerned about the market digesting 30-year supply. It has a less predictable demand base headed into the auction as a lot of investors don’t participate there at all.”
Yields on 30-year bonds increased four basis points, or 0.04 percentage point, to 4.26 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 4.375 percent note maturing in May 2041 dropped 193/32, or $5.94 per $1,000 face amount, to 101 30/32. The 30-year bond yields fell on June 1 to 4.13 percent, the lowest level since Dec. 1.
The 10-year note yields gained one basis points to 3 percent after earlier advancing five basis points. They touched 2.94 percent on June 1, the lowest since Dec. 7. Two-year note yields were little changed at 0.43 percent after reaching 0.41 percent on June 3, the lowest since Nov. 9.
Drop in Stocks
The Standard & Poor’s 500 Index dropped 1.1 percent, and the Dow Jones Industrial Averageslid 0.5 percent. Crude oil for July delivery slid 1.4 percent to $98.81 a barrel.
“Stocks took a dive into the close, which gave Treasuries a bid off of their lows,” Prakash said.
Treasuries rallied last week, prompting the biggest five- day drop in 10-year yields since May 6, after a weaker-than expected U.S. jobs report.
Nonfarm payrolls grew in May by 54,000 after an increase of 232,000 in the previous month, the Labor Department reported June 3. The median forecast of 89 economists in a Bloomberg News survey was for an addition of 165,000. The unemployment rate climbed to 9.1 percent from 9 percent.
The yield difference between two-year U.S. debt and 30-year Treasuries widened to the most in more than a month, with shorter-dated yields trailing those of longer-maturity bonds on speculation economic weakness will persuade the Fed to keep interest rates lower for longer.
Fed Rate Outlook
Futures contracts showed the likelihood of a boost in the fed funds target by the central bank’s March 2012 meeting fell to 24 percent, from 38 percent odds a month ago. The Fed has held its target rate for overnight lending between banks at zero to 0.25 percent since December 2008.
The central bank purchased $6.397 billion of debt maturing from December 2013 to May 2015 today under its $600 billion second round of quantitative easing. The program, also known as QE2, expires this month.
“The market doesn’t expect QE3, but the Fed is expected to stay on hold well into 2012,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “This week supply is coming down the pipeline, and the market wants to see how it’s received before making any big moves.”
Sales to Fed
Since the last auction of $32 billion in three-year notes on May 10, primary dealers have sold $8.3 billion, or half of the $16.608 billion in three-year notes they purchased at the sale of the securities to the Fed.
An exit from stimulus measures should start “long before” a recovery in the U.S. jobs market is assured, according to Philadelphia Fed President Charles Plosser.
“Somewhat tighter monetary policy is possible by the end of the year,” Plosser said today at a press conference after speaking at an event organized by the Bank of Finland in Helsinki. “We will have to begin exiting from our policies long before the unemployment rate is down to what people would like to have. That’s going to be a difficult decision.”
The risk of owning U.S. government debt is as great as at any time since the 1950s, with yields at the year’s lows and Treasury Secretary Timothy F. Geithner locking in borrowing costs by selling longer-term securities.
Potential for Losses
Yields on Treasuries would only need to rise 0.3 percentage point over one year on average from 1.67 percent to produce a loss, based on the benchmark Barclays Plc Treasury index, a study by Los Angeles-based First Pacific Advisors shows. The last time bonds were close to this level was in March 2009, when a 0.43 percentage point rise in yields would have left holders of comparable maturity five-year Treasuries with losses.
“You have to go back into the 1950s to find this kind of activity,” said Thomas Atteberry, who manages $3.7 billion in fixed-income assets at First Pacific in Los Angeles. “Interest- rate risk is the most acute it’s been in an extremely long time. I have to stay short, five years and in.”
Treasuries returned 1.6 percent in May in the largest monthly advance since August 2010, according to a Bank of America Merrill Lynch index.
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