Treasuries fall as weak auctions send yields above pre-Fed level
By Bloomberg
Treasuries fell, with the benchmark 10-year note giving up gains it posted after the Federal Reserve’s meeting last week, as tepid demand at government-debt auctions pushed yields higher.
Two of three Treasury auctions this week attracted the lowest level of bidding in about six years and a category linked with foreign demand and domestic money managers showed less- aggressive buying. Fed Chair Janet Yellen said Friday she expects the central bank to raise interest rates this year, and that subsequent increases will be gradual, echoing the stance that triggered the rally last week.
“Flexibility is still the name of the game,” said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of the 22 primary dealers that trade with the Fed. “The Fed’s trying to prepare the market for the first rate hike by softening the view of what happens afterwards.”
The U.S. 10-year yield added three basis points this week, or 0.03 percentage point, to 1.96 percent in New York, according to Bloomberg Bond Trader data. The price of the benchmark 2 percent note due February 2025 fell 9/32, or $2.81 per $1,000 face amount, to 100 10/32.
Bond Returns
The yields touched 1.85 percent March 25, the least since Feb. 6. Treasuries have returned 0.2 percent this month and 1.4 percent this year through Thursday, based on Bloomberg bond indexes. They returned 6.2 percent last year.
Yellen, in remarks prepared for delivery in San Francisco, reinforced the Fed stance that the timing a scope of interest- rate increases will be based on the path of the economy. The central bank has held its target for the federal funds at a virtually zero since December 2008 as it seeks to foster full employment along with its mandate to assure price stability.
Fed officials must sort through a mix of economic indicators, including an unexpected decline on February retail sales and below-forecast industrial production. Jobs growth has been a bright spot and that is projected to continue April 3 when the Labor Department is forecast to announce a 12th month of job gains exceeding 200,000 next week.
“I expect that conditions may warrant an increase in the federal funds rate target sometime this year,” Yellen said.
Futures Positions
Hedge-fund managers and other large speculators added the most bearish positions that gain from declines in 10-year note futures since September, according to Commodity Futures Trading Commission data. So-called net-short positions reached 179,807 contracts as of March 24, up from 107,530 the week before.
The March 26 sale of $29 billion in seven-year notes had the lowest demand in such a sale since May 2009, as measured by the amount of bids compared to the amount offered. That followed a March 25 sale of five-year notes where demand was its lowest since July 2009.
Indirect bidders, a class of investors that includes foreign central banks, bought 50.5 percent of the seven-year notes. That’s down from 54.2 percent at auctions in January and February.
“The key aspect this week versus last was the missing foreign bid, and the potential for Japanese repatriation of gains,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. With the rally in the dollar stalled “there’s not a much urgency” to buy.