BLBG: Treasuries Little Changed as $118 Billion in Note Sales Loom
By Theresa Barraclough
Dec. 24 (Bloomberg) -- Treasuries were little changed, heading for a weekly drop, as traders prepared for a record- tying auction of $118 billion in two-, five- and seven-year notes next week.
Ten-year yields were near the highest level in four months before government reports that may show orders for durable goods rebounded last month and the number of Americans filing for jobless claims declined. The reports may add to speculation a recovery in the world’s largest economy will fuel inflation, reducing the value of bonds’ fixed payments.
“There may be some position adjustments before the auctions,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo, part of Japan’s second-largest brokerage. “With better economic reports, people will be more optimistic about the U.S. economy. Should employment data improve, yields will climb to 3.8 percent.”
The benchmark 10-year note yielded 3.76 percent as 1:30 p.m. in Tokyo, according to BGCantor Market Data. The 3.375 percent security due November 2019 traded at 96 28/32. Yields, which yesterday touched 3.77 percent, the highest since Aug. 11, increased 22 basis points this week.
The Securities Industry and Financial Markets Associationrecommended that trading of Treasuries end today at 2 p.m. New York time and markets shut tomorrow for the Christmas holiday.
The U.S. will sell $44 billion in two-year notes on Dec. 28, $42 billion in five-year debt the next day and $32 billion in seven-year securities the day after that.
‘Acid Test’
“The acid test will come with next week’s auctions, especially in the five- and seven-year sales to see if we can get investors to put their money in intermediates,” said William O’Donnell, U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 18 primary dealers that trade with the Federal Reserve.
The $44 billion two-year auction would match the record offerings of October and November. The $42 billion five-year sale and $32 billion seven-year offering equal the all-time highest issues set last month.
President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year.
Orders for durable goods increased 0.5 percent in November after declining 0.6 percent in October, according to the median estimate of economists surveyed by Bloomberg News. Another report is forecast by economists to show initial jobless claims fell to 470,000 last week from 480,000 in the previous seven days. Applications have held below 500,000 since the third week of November, the best performance in a year.
Yield Spread
The difference in yields between two- and 10-year notes widened to a record this week as investors speculated the recovery will reduce demand at debt sales.
The spread reached 288 basis points on Dec. 22 and held at 283 basis points today. The previous record of 281 basis points was set on June 5, when Treasuries plunged after a government report showed the smallest decline in U.S. payrolls in eight months. Ten-year note yields touched 4 percent the following week, the highest level in 2009.
Worst Since 1994
Holders of U.S. Treasuries of all maturities have incurred a loss of 3.2 percent so far this year, according to Bank of America Merrill Lynch indexes. That is the worst performance since 1994.
Demand for shorter-term notes may increase after the Wall Street Journal reported that Federal Reserve Bank of St. Louis President James Bullard sees interest rates remaining near-zero in 2010.
Fed funds futures contracts on the Chicago Board of Trade show a 21.5 percent chance the central bank will increase rates by the April policy meeting, down from a 22.1 percent chance yesterday.
To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net
