Treasuries reverse in front of auction

Treasuries rose for the first time in four days as the backup in yields raised the allure of the $21 billion in 10-year notes to be sold today at auction.

Yields on the benchmark securities had climbed to a four- week high of 2.66 percent, compared with a yield of 2.61 percent at the last sale of the maturity on May 7. Traders are willing to pay to borrow the notes in the repurchase-agreement market in exchange for lending cash overnight for the most actively traded 10-year maturity, with rates opening today at negative 2.90 percent, according to data from ICAP Plc tracked by Bloomberg.

“Our market got a bit overdone on the downside,” said Brian Edmonds, head of interest-rates trading in New York at the primary dealer Cantor Fitzgerald LP. “Globally, yields are not rising, so there’s no reason for us to follow suit. There’s plenty of demand out there.”

The 10-year note maturing in May 2024 yielded 2.62 percent, down two basis points, or 0.02 percentage point, at 11:13 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5 percent notes rose 6/32, or $1.88 per $1,000 face value, to 98 30/32. The 2.66 percent yield was the highest since May 12.

The 10-year notes being sold today yielded 2.64 percent in pre-auction trading. Investors at the previous 10-year auction in May bid for 2.63 times the amount of debt available, down from 2.76 times on April 9.

Extra yield

Demand for Treasuries was supported as the extra yield that benchmark 10-year notes offer over their G-7 counterparts was at 69 basis points, after rising to 71 basis points yesterday, the most since April 2010. Yields on bonds in Europe dropped last week after European Central Bank policy makers unveiled an unprecedented stimulus package.

“People are playing the market from a defensive stance and buying Treasuries,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Ten-year yields got as high as 2.66 percent -- that might have brought in sidelined investors looking to take advantage of higher yields.”

Treasuries returned 2.6 percent this year, according to the Bloomberg U.S. Treasury Bond Index. The Bloomberg Global Developed Sovereign Bond Index has returned 3.7 percent this year, compared with a loss of 4.6 percent in 2013.

ETF flows

Government bond investors in the exchange-traded fund market have preferred longer-dated government debt this month. The iShares 20+ Year Treasury Bond saw inflows of $503 million, the second most of any fixed-income ETF. At the same time, the iShares three- to seven-year Treasury bond ETF saw outflows of $85 million.

Ten-year notes are in short supply in the market for borrowing and lending securities, which suggests investors will buy at today’s auction, said John Gorman, head of dollar- denominated interest-rate products for Asia at primary dealer Nomura Holdings Inc. in Tokyo.

“There’s really strong demand for the 10-year,” Gorman said. “Just because there’s a strong repo demand right now, the auction will probably go well today because a lot of people do need the 10-year notes.”

There may be demand from investors who are trying to unwind bets against Treasuries, Gorman said. At the same time, investors holding the securities may not want to lend them out, he said.

The government plans to conclude this week’s sales with a $13 billion auction of 30-year bonds tomorrow.

Bond bears

Treasuries fell yesterday as an auction of three-year notes drew a yield of 0.93 percent, the highest since May 2011, and an industry gauge of small-business optimism climbed to the most since 2007. Current three-year note yields rose three basis points today to 0.92 percent.

“Yesterday’s releases provided more fuel for the bond bears,” Jim Reid and Anthony Ip, strategists at Deutsche Bank AG in London and Sydney, wrote in an e-mailed note today. “There also seems to be a growing chorus of market participants who think that we’re starting to see a gradual shift in the Fed’s tone given the recent run of stronger U.S. economic data. The conclusion to this debate could be one of the most important themes” for the second half, they wrote.

U.S. reports tomorrow and the following day will show retail sales rose in May, initial claims for jobless insurance were little changed in the latest weekly report and consumer confidence improved in June, based on Bloomberg surveys.

The Fed is reducing its monthly asset purchases, while keeping the target for overnight lending between banks in a range of zero to 0.25 percent. Policy makers signaled at their April 29-30 meeting that interest rates will stay low for a “considerable time.” They next meet on June 17-18.

The chance of a rate increase to 0.5 percent or more by March 2015 is 17 percent, according to Bloomberg-compiled data based on federal fund futures. The odds of a boost by December of next year are 73 percent.

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