April 9 (Bloomberg) -- Treasury 10-year notes declined for the first time in five days before the U.S. auctions $21 billion of the benchmark securities today.
Inflation expectations approached the lowest level in six months before the Federal Reserve releases the minutes today of its March meeting, at which it cut its bond-buying program for a third time. The difference in yield between 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was within one basis point of the least since September, based on closing levels.
“U.S. bonds are trading cheaper,” said Craig Collins, managing director of rates trading at Bank of Montreal in London. “We do have supply on the horizon. We have tended to trade better into supply but there is a concession this morning as people are looking for the Fed minutes to have a more hawkish tone.”
The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.70 percent as of 7:02 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.75 percent note due in February 2024 fell 5/32, or $1.56 per $1,000 face amount to 100 14/32. The yield declined 12 basis points during the previous four days.
The spread in yields between the benchmark securities and 10-year TIPS was 2.12 percentage points.
Fed policy makers at their March 18-19 meeting cut monthly bond purchases by $10 billion to $55 billion. Fed Chair Janet Yellen said the central bank may start to increase interest rates “around six months” after ending its asset buying.
The Fed is winding down the stimulus program it has used to support the economy, while keeping its target for overnight lending between banks in a range of zero to 0.25 percent since 2008. The implied yield on 30-day federal funds futures contracts expiring in September 2015 was 0.505 percent, indicating investors expect the target to be higher by then.
A return to the Fed’s 2 percent inflation goal could take “on the order of” four years, Minneapolis Fed President Narayana Kocherlakota said yesterday in the text of speech in Rochester, Minnesota. Undershooting the price stability goal means the Federal Open Market Committee is underperforming on its objective of promoting full employment, Kocherlakota said.
The Fed’s preferred inflation gauge, personal consumption expenditures, dropped to 0.9 percent in February from a year earlier, the lowest since October, according to data released on March 28.
“Bond market participants expect only limited inflation,” said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $59.4 billion in assets. “If market participants start to believe the Fed will increase interest rates, long-term yields will go up, but it will be limited.”
The Treasury sold three-year debt yesterday, and it plans to auction 30-year bonds tomorrow. With today’s 10-year note, the sales total $64 billion.
The 10-year securities scheduled to be sold today yielded 2.71 percent in pre-auction trading, versus 2.75 percent at a previous auction on March 12. Investors bid for 2.92 times the amount offered in March, the highest level in a year at the monthly sales.
The auctions will benefit from money managers reinvesting funds paid out to them from maturing securities, said John Gorman, head of dollar-denominated interest-rate products for Asia at Nomura Holdings Inc. in Singapore. The company is one of the 22 primary dealers that underwrite the U.S. debt.
Investors hold $50.5 billion of Treasuries maturing on April 15, while the U.S. is raising $13.5 billion of new cash.
When the government issued this combination of securities in March, the sales also totaled $64 billion, though half of it was comprised of new cash.
Ten-year yields may rise to 3.25 percent in the next three months as U.S. employment improves, Gorman said.
Initial claims for unemployment benefits declined to 320,000 in the week ended April 5 from 326,000 the previous period, according to the median estimate of economists surveyed by Bloomberg News before the report tomorrow.
Data today will show wholesale inventories and sales increased in February, based on the responses of analysts in separate Bloomberg surveys.
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