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Treasuries Erase Gains as Traders Prepare for Record Auctions
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By Daniel Kruger and Cordell Eddings
April 26 (Bloomberg) -- Treasuries erased gains after the U.S. sold $11 billion of five-year inflation-protected debt and traders prepared for a record-tying $118 billion in note auctions over the next four days.
The Treasury Inflation Protected Securities, or TIPS, drew a yield of 0.55 percent, compared with a forecast of 0.523 percent in a Bloomberg News survey of eight of the Federal Reserve’s 18 primary dealers. Treasuries gained earlier on concern Germany may refuse to guarantee an early release of bailout funds to Greece, stoking demand for the safety of U.S. government debt.
“The TIPS auction contributed to a continuation of the downdraft we’ve had all morning long going into the auction,” said
George Goncalves, head of interest rate strategy at primary dealer Nomura Holdings Inc. “There is some friction ahead of supply.”
The
yield on the benchmark 10-year note was little changed at 3.82 percent at 1:26 p.m. in New York, according to BGCantor Market Data. The yield dropped as low as 3.78 percent. The price of the 3.625 percent security due in February 2020 fell 2/32, or 63 cents per $1,000 face amount, to 98 20/32.
This week’s auctions will include $44 billion in two-year notes tomorrow, $42 billion of five-year securities on April 28 and $32 billion in seven-year debt on the following day.
“We might need a bit more cheapening at the front-end for these auctions to go well,” said
Michael Pond, an interest-rate strategist in New York at primary dealer Barclays Plc. “Yields may need to cheapen a bit further for these auctions to do well.”
Direct Bids
The TIPS
bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.15. The average at the last five auctions was 2.44.
Indirect bidders, a class of investors that includes foreign central banks, purchased 23.1 percent of the notes. At the October sale, they bought 47.8 percent, higher than the average for the past five sales of 31.4 percent.
Direct bidders, which excludes the primary dealers required to bid on the auctions, were 13 percent, the highest level on record.
The
difference between yields on 5-year
notes and Treasury Inflation Protected Securities, a gauge of trader expectations for U.S. consumer prices, narrowed to 1.87 percentage points today, from this year’s high of 2.13 percentage points in January. The five-year average is 1.91 percentage points.
Greek Fiscal Crisis
Greek bonds tumbled on concern the European Union-led bailout for Greece will face hurdles as donor countries begin trying to ratify the nation’s aid package. The yield premium investors demand to hold the nation’s 10-year bonds rather than German bunds climbed to more than 600 basis points.
German Chancellor
Angela Merkel said Greece today that must satisfy the pre-conditions for emergency loans before Germany approves the aid under terms of a European Union-International Monetary Fund package.
Greek Finance Minister
George Papaconstantinou said in Washington over the weekend that investors will “lose their shirts” if they bet the nation will default.
Greece’s fiscal crisis dominated weekend meetings in Washington of finance ministers and central bankers from around the world after the nation said on April 23 it wanted as much as 45 billion euros ($60 billion) of financial support that was made available by its European neighbors and the International Monetary Fund.
Dominique Strauss-Kahn, the IMF’s managing director, said talks will end “in time to meet Greece’s needs.”
Sovereign Debt
“As developments continue to come out of Europe in regards to Greece, the peripheral European economies continue to play a role in price action,” said
Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The TIPS auction will garner significant attention with the lack of economic information of events for the market to key in on.”
Sovereign bonds yield an average 2.385 percent, about the same as a year ago and below the average of 3.08 percent in 2008, when the credit-market seizure led investors to seek the safety of government debt, according to Bank of America Merrill Lynch index data. The cost to borrow is steady even though the amount of bonds in the index that includes nations from the U.S. to the Germany and Japan has grown to $17.4 trillion from $13.4 trillion two years ago.
Global Inflation
While the debt helped the global economy recover from its first recession since World War II, yields show bond investors aren’t troubled that the growth will spur inflation. Consumer prices excluding food and energy costs rose 1.5 percent in February from a year earlier in the 30 countries that form the Organization for Economic Cooperation and Development, the smallest gain on record.
“The fact that inflation is very well behaved, that provides the cover for central banks to remain on the sidelines and continue to pursue accommodative policies to help the economy,” said
Thomas Girard, a senior money manager who helps oversee $115 billion in fixed-income assets with New York Life Investment Management in New York.
