BLBG: Treasuries Little Changed Before 10-Year Auction as Fed Meets
By Cordell Eddings and Matthew Brown
Aug. 12 (Bloomberg) -- Treasuries were little changed before a record $23 billion sale of 10-year notes today and as investors prepare for the Federal Reserve’s decision on interest rates and outlook for the economy.
The 10-year yield was near its lowest level in more than a week as the central bank may acknowledge economic growth will be faster than it anticipated while committing to keeping the target rate near the lowest level on record. Policy makers are also likely considering ending their $300 billion Treasury purchase program. Yesterday’s $37 billion three-year note sale drew more bids than at any of the past nine sales.
“The auction is not guaranteed to go as well as the one yesterday as the further out the curve you go the more difficult it will be for record-sized auctions to be taken down,” said Ian Lyngen, a senior government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Any indication of the Fed’s skew on the inflation environment will be important.”
The 10-year Treasury yield fell one basis point, or 0.01 percentage point, to 3.66 percent at 9:02 a.m. in New York. It earlier touched 3.63 percent, the lowest level since Aug. 4. The 3.125 percent security due May 2019 rose 3/32, or 94 cents per $1,000 face amount, to 95 21/32.
The Federal Open Market Committee is scheduled to issue its statement around 2:15 p.m. in Washington.
Announcement Predicted
Former Fed officials differ on whether the FOMC will announce today an intention to let its Treasury purchase program, unveiled in March as part of an effort to cap consumer borrowing costs, expire as scheduled in September.
Laurence Meyer, vice chairman of St. Louis-based Macroeconomic Advisers LLC and a central bank governor from 1996 until 2002, and Lyle Gramley, senior economic adviser at New York-based Soleil Securities Corp. and also a former governor, predicted the Fed will announce an end to the program.
Lee Hoskins, president of the Cleveland Fed from 1987 until 1991, and former Fed Vice Chairman Alan Blinder, a Princeton University economics professor, said policy makers will probably retain flexibility by delaying a publicly announced decision.
“If the FOMC simply restates previous programs, and leaves its options open, that might prove marginally bullish for Treasuries,” Ciaran O’Hagan, a fixed-income strategist in Paris at Societe Generale SA, wrote in a research report today.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was 1.89 percentage points, versus the five-year average of 2.20 percentage points.
Foreign Central Banks
Today’s auction of 10-year securities is the second of three sales totaling $75 billion this week. The Treasury is scheduled to sell $15 billion of 30-year bonds tomorrow.
Investors bid for 3.28 times the amount of debt on offer the last time the 10-year notes were auctioned in July, the highest on record. Indirect bidders, the class of investors that includes foreign central banks, bought 43.9 percent of the notes offered, the most since May 2007.
Treasuries climbed yesterday after the sale of a record $37 billion of three-year notes attracted the most demand ever from the group that includes central banks, easing concern foreign buyers will shy away from U.S. auctions as the economy revives.
Indirect bidders bought a record 62.5 percent of the notes. They purchased 54 percent in July after purchasing 43.8 percent in the prior auction. The average for the past seven auctions is 40.96 percent. Investors outside the U.S. own $3.29 trillion of the nation’s $6.78 trillion in marketable debt, both records.
Bearish on Treasuries
Goldman Sachs Group Inc., one of the 18 primary dealers required to bid at Treasury auctions, predicts the U.S. will sell about $2.9 trillion of debt in the two years ending September 2010, a reduction in its previous estimate for Treasury auctions by 28 percent which it attributed to the improving economy.
Investors are turning more bearish on Treasuries and the dollar on speculation their appeal will diminish as the first global recession since World War II shows signs of easing, a survey of Bloomberg users showed.
Expectations for higher yields on Treasuries and a weaker dollar over the next six months increased, according to 2,345 respondents from New York to Tokyo to London in the Bloomberg Professional Global Confidence Index. For the first time since November 2007, when the monthly survey started, Bloomberg users forecast the global economy will expand.
“We’ll probably push a bit higher in yield,” said Peter Jolly, Sydney-based head of market research for the investment- banking unit of National Australia Bank Ltd., the nation’s largest lender. “The recession is abating and we have ongoing supply. Rallies will be limited.”
The 10-year yield will advance to 4 percent by year-end, according to Jolly. That compares with the 3.80 percent median forecast of banks and securities companies compiled by Bloomberg.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net. Matthew Brown in London at mbrown42@bloomberg.net.
