Treasuries fell (CBOT:ZBZ13), after 10-year notes rose the most since July last week, as the U.S. prepares to sell $97 billion of debt over three days starting tomorrow.
U.S. government securities declined before Federal Reserve Bank of New York President William C. Dudley, Atlanta Fed President Dennis Lockhart and Dallas Fed President Richard Fisher all deliver speeches today. Debate over the federal budget and the debt ceiling, and recent political setbacks suffered by President Barack Obama and Republican congressional leaders, are increasing the odds of a government shutdown, debt default or near-miss that may roil financial markets.
“We have supply this week and five-year notes are looking a little bit rich ahead of that,” said Craig Collins, managing director of rates trading at Bank of Montreal in London. “The focus is on the debt ceiling and the next Fed chairman.”
The benchmark 10-year yield (CBOT:ZBN13) climbed one basis point, or 0.01 percentage point, to 2.75% at 7:06 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.5% note maturing in August 2023 fell 1/8, or $1.25 per $1,000 face amount, to 97 7/8.
The yield dropped 15 basis points last week, the steepest decline since the period ended July 12.
The Treasury is scheduled to sell $33 billion of two-year securities tomorrow, $35 billion of five-year notes the following day, and $29 billion of seven-year debt on Thursday.
Dudley will speak at the Fordham University Graduate School of Business following comments from Fed Bank of St. Louis President James Bullard last week indicating an October move to withdraw stimulus is possible. Lockhart will also speak in New York, while Fisher will speak at the Independent Bankers Association of Texas Annual Convention in San Antonio.
Fed Chairman Ben S. Bernanke cited the danger to the economy from the budget battles as one reason the central bank decided not to pull back on its monetary stimulus.
“Upcoming fiscal debates may involve additional risks to financial markets and to the broader economy,” Bernanke said at a Sept. 18 news conference following the Fed’s two-day meeting.
Fed Vice Chairman Janet Yellen is the leading candidate to replace Bernanke if he steps down in January, according to a survey by Bloomberg News. Lawrence Summers, who was seen as the probable pick and more likely to tighten monetary policy sooner, withdrew his candidacy last week.
Demand for new Treasuries from their biggest owners is proving impervious to rising yields and the retreat of Wall Street dealers.
Bids submitted by investors including mutual funds, foreign central banks, pension managers and insurance companies totaled 83 percent of Treasury debt auctioned this year, compared with 84% in 2012 and 37% in 2008 at the peak of the worst financialcrisis since the Great Depression, according to data compiled by Bloomberg.
Consistent demand from investors who control 81% of the $11.6 trillion in Treasuries is helping balance declining purchases from bond dealers and individuals in the worst year for government debt since 2009. Yields are rising as the economy improves, the U.S. prepares to refinance a record $1.38 trillion next year, the budget deficit shrinks to the least since 2008, the Fed plans to reduce its stimulus and Congress battles Obama over raising the borrowing limit.
“Sovereign wealth funds and central banks are going to continue to have demand for Treasuries,” said James Sarni, senior managing partner in Los Angeles at Payden & Rygel, which manages $85 billion. “Despite the fact there’s widespread concerns that rates are going up, there’s still demand coming from individuals looking for income,” while institutions prize their safety and liquidity, said Sarni, who has been buying high-yield company bonds.