Middle bond syndrome

5-year worst performer going into today's auction

Treasury five-year notes(CBOT:FVM14) were the worst performers among U.S. government securities during the past month before a $35 billion sale of the debt today.

Benchmark 10-year Treasuries(CBOT:TYM14) rose as tensions between Ukraine and Russia intensified after the government in Kiev vowed to oust militants. Demand for intermediate-term U.S. government debt gained as new home sales unexpectedly fell in March, raising speculation the economy may not experience a rapid growth surge amid warmer weather and as prices for longer- term debt have already risen.

“The bids are appearing in the intermediate sector for almost the first time in two weeks,” 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 22 primary dealers that trade with the Federal Reserve. “People came into March after the horrible winter we all suffered and expected a rebound in growth. You’ve got this Ukraine situation, which is percolating in the background and getting no better.”

Treasury 10-year yields fell three basis points, or 0.03 percentage point, to 2.68 percent as of 12:04 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.75 percent note due in February 2024 gained 1/4, or $2.50 per $1,000 face amount, to 100 18/32. The five-year note yield fell four basis points to 1.70 percent.

Note Sale

The five-year note to be sold today yielded 1.73 percent in pre-auction trading. If the yield on the security due in April 2019 is the same at the sale, it would be the highest for the monthly offerings since May 2011.

Five-year notes have lagged behind their peers amid speculation the Fed will implement a series of interest-rate increases over the next five years as the economy strengthens. Investors will recoup their principal sooner with shorter maturities, while longer tenors are benefiting from the outlook for slow inflation.

“The five-year definitively is going to be under pressure if we are going to enhance tightening prospects for that event,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “It has gotten cheaper over the last few weeks.”

Five-year notes returned 0.1 percent during the past month through yesterday, indexes compiled by Bank of America Merrill Lynch show. Two-year securities earned 0.2 percent and 10-year debt gained 0.4 percent.

Auction Totals

The U.S. sold $32 billion of two-year notes yesterday at a yield of 0.447 percent. The Treasury will conclude this week’s note auction with $29 billion of seven-year notes tomorrow.

Treasuries were supported today as security agencies are seeking to eliminate all militias operating in Kramatorsk, Slovyansk and other cities, Ukraine’s First Deputy Prime Minister Vitali Yarema told reporters in Kiev today.

With international efforts to defuse the crisis grinding to a halt, the U.S. said it will send 600 troops for exercises in four countries bordering Russia, days after NATO bolstered the defense of frontline member states in eastern Europe.

New home sales dropped 14.5 percent to a 384,000 annualized pace, lower than any forecast of economists surveyed by Bloomberg and the weakest since July, Commerce Department data showed. The median forecast of 74 economists surveyed by Bloomberg News called for the pace to accelerate to 450,000.

Yield Moves

The 10-year Treasury yield has declined this year since reaching a two-year high of 3.05 percent in January. The yield difference between 30-year bonds and five-year notes shrank to 1.75 percentage points yesterday, the narrowest since 2009.

Fed Chair Janet Yellen signaled after the central bank’s previous policy meeting on March 19 that interest rates may increase in the middle of next year. This month, she signaled the economy still needs support from the central bank, saying “there is little question” that the U.S. has remained far from maximum employment.

Futures prices put the likelihood that the Fed will start raising borrowing costs in July 2015 at 68 percent, compared with 47 percent in June 2015, based on trading on the CME Group Inc.’s exchange.

 

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