Treasuries fall for first time in four days amid bets on taper

Treasuries ended a three-day advance amid speculation a U.S. budget agreement will support the economy and make it easier for the Federal Reserve to start reducing bond purchases.

U.S. 10-year notes (CBOT:ZNH14) headed for the worst annual performance in four years before the government sells $21 billion of them in its last auction of the securities for 2013. Budget negotiators unveiled an agreement yesterday to ease automatic spending cuts by about $63 billion over two years and cut the deficit by $23 billion, ending a three-year cycle of fiscal standoffs.

“It would have to slightly increase the odds of a December taper,” said William O’Donnell, head U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, one of 21 primary dealers that trade with the U.S. central bank. “We may be closer to the point where the Fed feels job gains are sustainable.”

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.82% at 10:50 a.m. in New York, after falling seven basis points during the previous three days, according to Bloomberg Bond Trader data. The price of the 2.75% note maturing in November 2023 decreased 5/32, or $1.56 per $1,000 face value, to 99 3/8.

Ten-year securities were poised for a 6.7% loss in 2013, the biggest drop since a 9.7% slide in 2009, Bank of America Merrill Lynch indexes show. Yields climbed more than 1 percentage point this year as improvement in the U.S. economy led traders to prepare for the Fed to reduce its bond purchases.

Today’s Auction

The notes being sold today yielded 2.83% in pre-auction trading. Bids are due by 1 p.m. New York time. The 10-year debt offering on Nov. 13 drew a yield of 2.75%, after selling at 2.657% the previous month.

The November sale’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.70, versus an average of 2.71 at the past 10 auctions. The offering drew the most demand in five months from the investor class that includes foreign central banks. Indirect bidders purchased 47.7% of the notes, the most since June.

The Treasury auctioned $30 billion of three-year notes yesterday at a yield of 0.631%, and plans to offer $13 billion of 30-year bonds tomorrow.

“Supply and the budget news are weighing on the market,” said Sean Murphy, a trader in New York at the primary dealer Societe Generale SA. “The Fed has been looking to the government for help, and the budget deal looks like it has a lot more substance, which means they got assistance on the fiscal side, which brings us closer to Fed tapering.”

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