“We’ve had a slow patch in manufacturing, and it looks like we could be coming back here as we enter the second half of the year,” said Jacob Oubina, a senior economist in New York at Royal Bank of Canada’s RBC Capital Markets, one of 21 primary dealers that trade with the Fed.
Confidence among U.S. consumers climbed in June to the highest level in more than five years. The Conference Board’s index rose to 81.4. Home prices rose more than forecast in the 12 months through April, with the S&P/Case-Shiller index of property values increased 12.1% from April 2012. New-home sales increased 2.1% in May, government data showed.
The yield gap between U.S. 10-year notes and comparable Treasury Inflation Protected Securities, a measure called the break-even rate that signals traders’ expectations for inflation over the life of the debt, widened for the first time in five days. It increased to 1.95 percentage points after touching 1.81 percentage points yesterday, the narrowest since October 2011.
Bernanke, speaking June 19 after a two-day meeting of the Federal Open Market Committee, said reducing bond purchases would depend on the economy achieving the central bank’s objectives. Policy makers are forecasting growth of as much as 2.6% this year and 3.5% in 2014.
Volatility in Treasuries increased for the past six days, the longest stretch in a year. As measured by Bank of America Merrill Lynch’s MOVE index, it climbed to 110.98 yesterday, according to the latest available data, the highest since November 2011. It has averaged 62 this year.
The Fed has been buying $45 billion of U.S. government debt and $40 billion of mortgage securities every month to put downward pressure on borrowing costs in its third round of asset purchases since 2008. It purchased $1.46 billion today of Treasuries due from February 2036 to November 2042.
Today’s two-year note auction had a bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, of 3.05, almost matching the May sale’s 3.04, the least since February 2011. The average at the past 10 sales was 3.63.
A Bloomberg News survey of seven of the Fed’s primary dealers forecast an auction yield of 0.423%. The 0.430% yield at the sale was the highest since May 2011.
“The market is moving to higher yields, and the short end is following along,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, which as a primary dealer is obligated to bid at U.S. government debt auctions. “The auction was fair. The stats were mixed. The questionable auctions will be tomorrow and Wednesday.”
The Treasury will sell $35 billion of five-year notes tomorrow and $29 billion of seven-year securities on June 27.
Indirect bidders, an investor class that includes foreign central banks, purchased 35.8% of the notes at today’s auction, the most since February 2012. That compared with an average of 23.8% at the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 7.8% of the notes, the least since April 2012, versus an average of 24.8% at the past 10 auctions.
Investors have bid $2.96 for each of the $1.01 trillion of notes and bonds sold by the Treasury this year, compared with a record high $3.15 for all of last year.