U.S. Treasuries Rise as Cheapness Versus Peers Draws Demand

By Anchalee Worrachate and Wes Goodman

Treasuries advanced as investors were attracted to the recent rise in yields that made the securities the cheapest versus their international counterparts in seven years.
The yield difference, or spread, between two-year notes and benchmark 10-year securities narrowed to the least in more than a year. A two-year auction yesterday drew close to the highest yield in three years after Federal Reserve Chair Janet Yellen said last week the central bank may raise interest rates from zero sooner than policy makers estimate if labor markets keep improving.
“Some investors in Europe are buying Treasuries to
seek better yields because of the economic and Fed’s policy outlook,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “The Treasury curve is likely to maintain its flattening trend amid speculation the Fed is heading for a tighter policy.”
The Treasury 10-year yield dropped two basis points, or 0.02 percentage point, to 2.38 percent at 6:54 a.m. New York time, according to Bloomberg Bond Trader data. The 2.375 percent note maturing in August 2024 rose 7/32, or $2.19 per $1,000 face amount to 100.
Two-year rates were little changed at 0.52 percent. The spread between the two securities fell to as low as 185 basis points today, the least since June 2013.

Curve Flattens

A yield curve is a chart showing rates on bonds of different maturities. A so-called flatter curve suggested some investors expect short-term interest rates to rise.
The extra yield on Treasuries over their Group-of-Seven counterparts was 79 basis points at the close of trading yesterday, the widest since June 2007.
Durable goods orders jumped by a record 22.6 percent in July, surpassing the median estimate of 8 percent growth in a Bloomberg News survey, the Commerce Department said yesterday. The Citigroup Economic Surprise Index climbed to 27.3, the highest level since Feb. 5. A positive number means data releases have been stronger than expected.
The U.S. economy expanded at a 3.9 percent annualized rate in the second quarter, according to a separate Bloomberg survey before the Commerce Department releases the revised figures tomorrow. The economy shrank 2.1 percent in the first three months of the year, the largest contraction since March 2009.
Yellen’s comments made in Jackson Hole, Wyoming, on Aug. 22, added to speculation the central bank is preparing to boost interest rates next year. The majority of Fed officials predict the central bank will start raising borrowing costs in 2015 based on forecasts it published in June.

Rate Outlook

Traders saw about a 54 percent chance the Fed will increase its benchmark rate from the current range of zero to 0.25 percent by July 2015, according to futures data compiled by Bloomberg.
The U.S. is scheduled to sell $35 billion of five-year notes and $13 billion of two-year floating-rate debt today, followed by $29 billion of seven-year securities tomorrow.
Yesterday’s two-year sale drew a yield of 0.53 percent, compared with 0.544 percent at the previous auction of the securities in July, which was the highest since May 2011.
The five-year notes being sold today yielded 1.66 percent in pre-auction trading. At the previous auction on July 29, investors bid for 2.81 times the amount available, the highest since March at the monthly sales.

Auction Results

Direct bidders, non-primary-dealer investors that place bids directly with the Treasury, bought 25.9 percent of the notes on offer, the most since December 2012. Indirect bidders, the investor class that includes foreign central banks, purchased 48.2 percent, the least in three months.
The last sale of two-year floating-rate debt drew bids for 4.09 times the amount offered, the lowest level since the government began selling the notes in January.
Robert Michele, the chief investment officer for fixed income, currencies and commodities at JPMorgan Asset Management, said the global economic recovery is “sub trend.”
U.S. yields are attractive especially versus Spain, he said, with 10-year notes in the European country paying less than Treasuries at 2.09 percent. Corporate debt including high-yield securities is also attractive, he said in a Bloomberg Television interview in New York yesterday.
The bond market will be a reliable place to invest until the central bank boosts rates, said Michele, who oversees $380 billion.

‘Safe Bet’

“It’s a safe bet for the time being,” Michele said. “When the Fed begins to raise short rates, that’s when we’ll begin to see some comfort level on taking profits in bonds.”
Inflation that’s holding in check will support Treasuries, said Hideaki Kuriki, a debt trader at Sumitomo Mitsui Trust Asset Management Co. in Tokyo.
“The Fed will raise the fed funds rate next year,” he said. “Treasury yields may go up but the room is limited because the inflation rate is still at a low level.” Kuriki said he’s keeping his Treasury holdings even with the benchmark he uses to gauge performance. Sumitomo Mitsui Trust oversees the equivalent of $46.7 billion in assets.
The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was little changed at 2.15 percentage points. The average for the past decade is 2.20.