Treasuries declined as the U.S. sold $21 billion in 10-year notes amid speculation yields on government securities may not fall much further even if the Federal Reserve increases purchases of debt.
The offering drew a yield of 2.475 percent, compared with the average forecast of 2.484 percent in a Bloomberg News survey of 8 of the Fed’s 18 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.99, versus an average of 3.1 for the past 10 sales. The auction was the second of three note and bond offerings this week totaling $66 billion. Stocks climbed.
“The selloff is not trivial given the expectation that the Fed is coming in to buy a lot more Treasuries,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG, which as a primary dealer is obligated to participate in Treasury auctions. “The market might be pricing in a bit of a possible disappointment in regards to quantitative easing and what might come down the hatch.”
The yield on the 10-year note increased four basis points, or 0.04 percentage point, to 2.48 percent at 1:35 p.m. in New York, according to BGCantor Market Data. Ten-year yields touched a 2010 high of 4.01 percent on April 5 and a low of 2.33 percent on Oct. 8. Thirty-year bond yields rose five basis points to 3.87 percent.
The Standard & Poor’s 500 Index climbed 1.1 percent.
The auction was the second reopening of the $24 billion 10- year note sale on Aug. 11. The notes drew yields of 2.73 percent in August and 2.67 percent in September.
Foreign Central Banks
Indirect bidders, an investor class that includes foreign central banks, purchased 41.5 percent of the securities today, compared with 54.7 percent at the sale on Sept. 8 and an average of 40 percent for the past 10 auctions.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 10.7 percent of the notes, compared with an average of 13.9 percent for the past 10 offerings.
“The auction was strong enough,” said Sergey Bondarchuk, an interest-rate strategist in New York at primary dealer BNP Paribas SA. “Investors prefer to move out the curve in search of yield pickup, and the Fed will be more acting in longer maturities. QE is more supportive of the belly of the curve out to the 10-year note.”
Record Yield Premium
Treasury 30-year bonds reached a record yield premium today over 10-year notes amid speculation the Fed will concentrate on purchases of medium-term debt in bond purchases to spur the economy, a strategy known as quantitative easing. The difference between yields on 10- and 30-year securities reached 1.4 percentage points, the widest since Bloomberg started tracking the figures in 1977.
The longest maturities, the most sensitive to inflation expectations, also lagged behind shorter-term notes after minutes released yesterday of the Fed’s Sept. 21 meeting showed policy makers were prepared to ease monetary policy “before long.” The minutes showed the Federal Open Market Committee also focused on purchases of Treasuries and boosting inflation expectations as ways to add stimulus.
The Fed may resume its quantitative-easing program in November, when it next meets, BNP Paribas SA said today. Policy makers are likely to announce “an initial purchase amount of $500 billion in long-term securities,” Yelena Shulyatyeva, an economist in New York, wrote in a research report.
Bank of America Merrill Lynch said Fed bond purchases would be an attack on the wrong problem.
‘Count Us as Skeptical’
“Count us as skeptical if not on the likelihood of QE2 then certainly on its effectiveness,” strategists led by Jeffrey Rosenberg in New York wrote in a note to clients dated yesterday. “It is not the supply or cost of credit that is currently the deterrent to economic activity. Rather, confidence remains low, suppressing investment and demand for credit.”
The Fed has already acquired about $1.75 trillion of Treasury and mortgage-related debt to sustain the recovery, concluding the program in March. A year earlier, the central bank explained in a statement that it aimed to support the mortgage lending and housing markets and to improve conditions in private credit markets.
The spread between yields on 10-year notes and Treasury Inflation Protected Securities, an indication of inflation expectations, widened 0.04 percentage point to 2.03 percentage points. The five-year average is 2.10 percentage points.
The Treasury sold $32 billion in three-year debt yesterday at a yield of 0.569 percent, the lowest yield on record in an auction of the security. It will auction $13 billion of 30-year bonds tomorrow.
Ten-year securities have returned investors 0.92 percent this month, outperforming the 0.31 percent gain for the broader Treasury market, according to Bank of America Merrill Lynch indexes. Thirty-year bonds lost 1.76 percent.