Treasury bonds fall

Treasury 30-year bonds fell, widening the gap between yields on the securities and five-year notes from the least since 2009, as U.S. prepared to sell $109 billion in fixed- and floating-rate debt this week.

The long bonds dropped for the first time in three days as U.S. consumer confidence rose to the highest level in six years. The gap between the maturities, or yield curve, narrowed last week after Federal Reserve Chair Janet Yellen signaled interest rates may rise as soon as next year as the economy strengthens.

“The first hike is likely 12 months or so away still--you can only price so much in so soon,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the U.S. central bank. “The front end started to be fully priced for some of those hikes next year. We had gotten to levels where it also made sense to just book some profits.”

The 30-year bond yield rose three basis points, or 0.03 percentage point, to 3.59 percent at 10:52 a.m. New York time, according to Bloomberg Bond Trader prices. The price of the 3.625 percent note due in February 2044 fell 17/32, or $5.31 per $1,000 face value, to 100 19/32.

Yields on five-year securities fell two basis points to 1.71 percent, and those on benchmark 10-year notes gained one basis point to 2.74 percent.

Yield Curve

The extra yield 30-year Treasuries offer over five-year securities widened for the first time in three days, reaching 1.88 percentage points after dropping to 1.83 percentage points, the narrowest since October 2009. The spread has averaged 2.23 percentage points over the past five years.

The gap between the yields on two-year notes and the 30- year bond widened to 3.16 basis points after touching 3.12 basis points, the narrowest since July. Yields on two-year notes rose eight basis points last week, the most since June.

A yield curve plots the rates of bonds of the same quality, but different maturities. It steepens when yields on shorter- maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously. Longer-term bonds tend to rise or fall based on the outlook for inflation, while shorter maturities are anchored by the Fed’s policy rate.

Treasuries due in one to three years yielded six basis points more than same-maturity non-U.S. sovereign debt as of yesterday, based on Bank of America Merrill Lynch data. The difference was the most since April 2010. It was negative as recently as last week. 

Increasing Odds

Yellen suggested March 19 that policy makers may increase the federal funds rate, which banks charge each other for overnight loans, in the middle of 2015.

The central bank’s debt-buying program, which it used to support the economy by putting downward pressure on interest rates, may end this year and the first rate increase may come six months after that, Yellen said. Fed board members cut its monthly bond purchases to $55 billion last week, from $85 billion in 2013.

The odds policy makers will increase the rate to 0.5 percent or more by January are about 17 percent, based on futures contracts. They were 11 percent a month ago.

“You saw the reaction in the market after Yellen, you saw a flatter curve,” said Sean Murphy, a trader at primary dealer Societe Generale SA in New York. “All you’re seeing now is a correction.”

Even as the Fed withdraws stimulus and debates a rate increase, inflation continues to lag. The five-year, five-year forward break-even rate, which projects consumer-price increases from 2019 to 2024, fell to 2.39 percent last week, the lowest level since June.

Confidence Grows

The Conference Board’s index of U.S. consumer confidence rose to 82.3 in March from 78.3 a month earlier, the New York- based private research group said today. It was the highest reading since January 2008. The median forecast in a Bloomberg survey of 76 economists called for a reading of 78.5 this month. Estimates ranged from 75 to 80.

Another report today showed home values in 20 cities advanced in the year through January at the slowest pace since August. Prices climbed 13.2 percent from January 2013 after rising 13.4 percent in the 12 months ended in December, according to the S&P/Case-Shiller index.

Sales of new homes declined 3.3 percent to a 440,000 annualized pace, following a 455,000 rate in the prior month that was the strongest in a year, figures from the Commerce Department showed in Washington. The median forecast of 77 economists surveyed by Bloomberg called for 445,000.

At the last Treasury two-year auction on Feb. 25, investors bid for 3.6 times the amount of debt offered. The average for the prior 10 sales including February’s was 3.3 times.

Indirect bidders, the investor class that includes central banks outside the U.S., purchased 34.3 percent of the securities. It was the most since June at the monthly sales.

The Treasury plans to auction $32 billion of two-year debt today, $35 billion of five-year debt tomorrow and $29 billion in seven-year securities the next day. It will also sell $13 billion of two-year floating-rate notes tomorrow.

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