Treasuries fell for a third day as a decline in U.S. unemployment-insurance claims and a gain in retail sales sapped demand at the government’s auction of $13 billion of 30-year bonds.
Losses were tempered by concern a budget standoff may push the U.S. economy into recession. The sale drew a yield of 2.917 percent, the highest since May, versus a 2.889 percent forecast in a Bloomberg News survey of six of the Federal Reserve’s 21 primary dealers. Long bonds had erased losses just before the auction after U.S. House Speaker John Boehner said President Barack Obama isn’t serious about resolving the fiscal stalemate.
“The market got ahead of itself before the bid,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “There remains continued optimism that the economy will be better next year as long as headwinds die down.”
The yield on the current 30-year bond increased two basis points, or 0.02 percentage point, to 2.91 percent at 3:46 p.m. in New York, according to Bloomberg Bond Trader data. It reached 2.93 percent earlier, the highest level since Nov. 2, before touching 2.88 percent. The 2.75 percent security due in November 2042 fell 11/32, or $3.44 per $1,000 face amount, to 96 7/8.
Yields on the benchmark 10-year note rose three basis points to 1.73 percent. They touched 1.74 percent, the highest since Nov. 7.
Recession Prospect
Stocks slid as U.S. lawmakers from both political parties expressed renewed pessimism today about the prospects for resolving the budget struggle before more than $600 billion automatic in tax increases and spending cuts start taking effect in January. The Congressional Budget Office has said that if nothing changes, the stalemate probably would lead to a recession.
The Standard & Poor’s 500 Index dropped as much as 0.9 percent, snapping a six-day winning streak.
At today’s auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.5, versus an average 2.61 at the past 10 sales. The ratio was 2.77 percent at the November sale, the highest level this year.
Indirect bidders, an investor class that includes foreign central banks, purchased 33.7 percent of the notes. That compared with 45.4 percent of the notes at the November sale, the most since April 2011, and an average for the past 10 offerings of 33.9 percent.
Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 20.3 percent, the most since June., versus 12.4 percent at the last sale and an average of 14.9 percent at the past 10.
“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.
