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.
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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