Treasuries fell, pushing 10-year yields up to the highest level in two weeks, as the U.S. prepared to sell $32 billion in three-year debt in the first of three note and bond sales this week totaling $66 billion.
Longer-term securities led the declines after a report showed German investor confidence jumped more than forecast this month. The yield gap between Treasuries and inflation-indexed debt indicates inflation expectations are at the highest level in a month as Federal Reserve policy makers start a two-day meeting at which they’re forecast to decide to make additional Treasury purchases.
“There’s a big chunk of supply,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “It puts a little pressure on the market. The three-year auction won’t be a big deal. The front end has plenty of buyers.”
The benchmark 10-year yield climbed four basis points, or 0.04 percentage point, to 1.65 percent at 9:56 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 fell 10/32, or $3.13 per $1,000 face amount, to 99 3/4. The yield matched its level on Dec. 3, the highest since Nov. 27.
Ten-year break-even rates, the difference between yields on U.S. 10-year notes and Treasury Inflation Protected Securities, touched 2.51 percentage points, the most since Nov. 7. The gap measures investor expectations for inflation over the life of the securities.
Thirty-year yields rose four basis points to 2.84 percent.
The three-year notes to be sold today yielded 0.33 percent in pre-auction trading, compared with a yield of 0.392 percent at the previous sale of the maturity on Nov. 6.
Investors bid for 3.41 times the amount of debt available last month, down from 3.96 times at the Oct. 9 sale. Primary dealers, which trade directly with the Fed, bought 52.7 percent of the securities, the most in three months.
“Three-year notes are at expensive, historically rich levels,” said Craig Collins, managing director of rates trading at Bank of Montreal in London. “This little backup in yields we’ve had will probably help the auction go even better.”
Short-term Treasuries may be supported by a potential flood of cash into the U.S. money markets if unlimited Federal Deposit Insurance Corp. coverage is allowed to lapse later this month.
“There are enough people on the front end willing to be long,” Roth of Mitsubishi UFJ said, referring to bets that shorter-term securities will gain. “Everyone thinks the expiration of the TAG program will cause a wave of inflows.”
The FDIC’s expanded deposit insurance is part of the Transaction Account Guarantee Program, known as TAG. An emergency 2008 government provision providing unlimited insurance on certain bank accounts during the U.S. financial crisis to help prevent sudden withdrawals will expire at the end of the year unless Congress extends it.
There’s about $1.4 trillion sitting in banks’ non-interest- bearing transactions accounts that hold more than $250,000, the previous insurance ceiling, FDIC data show. It will become uninsured in January if Congress doesn’t act.
The Treasury is scheduled to auction $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds Dec. 13.
Volatility in Treasuries traded close to the lowest level since 1988. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, was at 52.2 basis points yesterday, up from the 51 basis points reached on Dec. 3. It has averaged 71 basis points in 2012. Volatility reached 265 basis points in October 2008 as the financial crisis intensified.
The Fed will announce tomorrow after a two-day meeting that it will begin buying $45 billion in Treasuries each month, pushing its balance sheet almost to $4 trillion, according to a Bloomberg survey of economists.
Forty-eight of 49 economists predict the Federal Open Market Committee will purchase the securities to bolster an existing program to buy $40 billion in mortgage bonds each month. Policy makers pledged in October to continue that plan until the labor market improves “substantially.”
A program known as Operation Twist, in which the Fed sells shorter-maturity Treasuries and buys longer-dated debt, is due to expire at the end of the month. As part of the plan, the central bank will buy as much as $1.5 billion today of TIPS due from January 2019 to February 2042.
The Fed bought $2.3 trillion of assets from 2008 to 2011 in two rounds of the stimulus strategy called quantitative easing.
“The market is still expecting something” from the Fed, said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “When we maybe look at things like the labor market and other measures we don’t really see a substantial improvement, so these further easing fantasies are there.”
Treasuries declined earlier as the ZEW Center for European Economic Research said its index of German investor and analyst expectations, which is designed to predict economic developments six months in advance, climbed to 6.9 this month from minus 15.7 in November. Economists in a Bloomberg survey predicted a gain to negative 11.5.