Treasuries fall a third day as economic data damp auction demand

Value Questioned

“There are some people questioning the value of sub-3 percent 30-year yields,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “Still, until we get a better idea about the economy and the fiscal cliff, the market is going to stay relatively well bid.”

Thirty-year bonds have returned 3 percent this year, compared with a 2.3 percent gain in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes.

Today’s auction was the last of three Treasury note and bond offerings this week totaling $66 billion. The U.S. sold $21 billion of 10-year debt yesterday at a yield of 1.652 percent and auctioned $32 billion of three-year notes on Dec. 11 at a record-low yield of 0.327 percent.

The government will sell next week $35 billion in two-year notes, an equal amount of five-year securities, $29 billion in seven-year debt and $14 billion in five-year Treasury Inflation Protected Securities. The auctions will be on four consecutive days beginning Dec. 17.

Less Costly

Treasuries traded today at the least expensive levels in more than five weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.84 percent, the least costly since Nov. 6. It was negative 0.96 on Dec. 6.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.77 percent.

Bonds fell earlier after initial claims for unemployment benefits in the U.S. declined more than forecast and retail sales increased, adding to signs of resilience in the world’s largest economy.

Applications for jobless benefits fell by 29,000 to 343,000 in the week ended Dec. 8, the fewest since reaching a four-year low in the period ended Oct. 6, Labor Department data showed. A Bloomberg survey forecast 369,000.

U.S. retail sales increased 0.3 percent in November, after dropping 0.3 percent the previous month, Commerce Department figures showed today in Washington.

Inflation Bets

Bonds dropped yesterday amid speculation inflation will rise after the Fed said it plans to buy $45 billion of U.S. government securities each month from January. Policy makers also took the unprecedented step of linking stimulus measures to unemployment and inflation.

The purchases will follow the expiration at year-end of Operation Twist, a $667 billion program in which the central bank has sold about $45 billion in short-term Treasuries each month and bought an equal amount of longer-term debt.

The Fed bought $4.7 billion today of securities maturing from February 2021 to November 2022 as part of Operation Twist. It sold $7.6 billion of Treasuries due in 2015.

Bloomberg News

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