Brian Edmonds Comments: Treasuries Fall, Pushing Two-Year Yields Up From Record Before Retail Data
August 12, 2010, Bloomberg
Treasuries dropped after the government sold $16 billion of 30-year bonds as traders waited for more evidence of a stalled economic recovery before pushing debt prices higher.
Two-year note yields rose from a record low reached yesterday after the Federal Reserve said on Aug. 10 it would reinvest principal payments on mortgage assets into U.S. debt to support the economy. The government’s long-bond auction drew the lowest yield in more than a year before reports tomorrow on retail sales and inflation.
“The Treasury market is moving back to the basics of fundamentals,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist at Morgan Stanley Smith Barney. “Tomorrow’s data is in the cross hairs and will be important for market direction.”
The yield on the two-year note increased 3 basis points, or 0.03 percentage point, to 0.55 percent at 4:20 p.m. in New York, according to BGCantor Market Data. The price of the 0.625 percent security maturing in July 2012 dropped 2/32, or 63 cents per $1,000 face amount, to 100 5/32. The yield touched 0.4892 percent yesterday, the all-time low.
The current 30-year bond yield fluctuated, increasing 3 basis points to 3.95 percent. It earlier touched the three-week low of 3.89 percent.
At today’s bond auction, the securities drew a yield of 3.954 percent, the lowest since a sale of the securities in March 2009. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.77, versus 2.89 at the previous sale and an average for the past 10 offerings of 2.61.
Indirect Bidders
Indirect bidders, an investor class that includes foreign central banks, purchased 46 percent of the bonds today, the highest since September 2009. Direct bidders, non-primary-dealer investors who place their bids directly with the Treasury, bought 18.6 percent, compared with an average of 17 percent.
The extra yield that investors demand for 30-year bonds compared with 10-year debt slid to 1.20 percentage points after widening to 1.25 percentage yesterday, the most since the Treasury began regularly scheduled sales of the longer-dated securities in 1977.
“There will continue to be demand for Treasuries and for yields, and it’s finally moving out the long end of the curve,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of 18 primary dealers that are required to participate in government auctions.
U.S. Retail
Economic reports from the government tomorrow are forecast to show U.S. retail sales probably rose in July for the first time in three months as incentives spurred auto purchase and consumer prices were restrained.
The Labor Department reported today that initial jobless claims unexpectedly increased to 484,000 in the week ended Aug. 7, the highest level since February. The median forecast of 42 economists in a Bloomberg News survey was for a drop to 465,000 from a previously reported 479,000.
“The employment picture has been weak and is potentially getting weaker,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “Investors should buy on dips as rates should continue to grind lower.”
A lack of jobs will curtail consumer spending and restrain the U.S. recovery more than previously estimated, economists surveyed by Bloomberg News said.
Slower Expansion
Gross domestic product will expand at an average 2.55 percent annual rate in the last six months of 2010, according to the median of 67 estimates in a survey taken from July 31 to Aug. 9, down from the 2.8 percent pace projected last month.
The Standard & Poor’s 500 Index dropped as much as 1.2 percent today to its lowest intraday level since July 22 on the increase in jobless claims before finishing the day with a decline of 0.5 percent. Crude oil for September delivery fell for a third day, dropping 2.8 percent to $75.86 a barrel.
The Fed’s decision to resume buying Treasuries should eventually boost demand for riskier assets, according to Anthony Crescenzi of Pacific Investment Management Co.
The central bank’s reduction of its target lending rate to virtually zero in 2008 didn’t have an immediate reaction either, said Crescenzi, a strategist at Newport Beach, California-based Pimco, in an “In the Loop” interview on Bloomberg Television.
“It took until March 2009 until it was risk-on,” said Crescenzi, whose company manages the world’s largest bond fund. “It was many months. The Fed will hope that this is a short- term reaction.”
The benchmark note isn’t overpriced when viewed in the context of the fed funds rate at 0.2 percent and the annual core inflation rate of 0.9 percent, Crescenzi said.
The Fed said yesterday it will buy about $18 billion of Treasury securities and Treasury Inflation Protected Securities through mid-September under the central bank’s plan announced after its Aug. 10 meeting. The first purchases will be on Aug. 17 for U.S. debt maturing from August 2014 to July 2016, according to the New York Fed’s website.
