Ten-year yields rose for a third day as the Institute for Supply Management’s gauge of non-manufacturing businesses expanded in March at the fastest pace in almost four years and pending home sales last month gained the most since October 2001. The U.S. will sell $8 billion in inflation-indexed notes.
“The data shows that the economic recovery has momentum and the Treasury market is starting to price that in,” said Michael Pond, an interest-rate strategist in New York at Barclays Plc, one of 18 primary dealers required to bid at Treasury auctions. “Rates should head higher into the auctions. Investors are trying to figure out what might get us over that 4 percent hump. If data continues to surprise to the upside, that could happen soon.”
The 10-year note yield rose 5 basis points, or 0.05 percentage point, to 3.99 percent at 10:48 a.m. in New York, according to BGCantor Market Data. That’s the highest level since June 11. The 3.625 percent security due in February 2020 fell 13/32, or $4.06 per $1,000 face value, to 97 2/32.
The ISM’s index non-manufacturing businesses, which make up almost 90 percent of the U.S. economy, rose to 55.4 in March from 53 the prior month. Readings above 50 signal expansion. U.S. pending home sales gained 8.2 percent in February from the previous month.
Debt Sales
Today’s auction of 10-year Treasury Inflation-Protected Securities is the first of four note and bond sales this week totaling $82 billion. Ten-year notes fell the most since December the week of March 27, when the U.S. sold $118 billion of 2-, 5- and 7-year debt.
Demand for U.S. debt was below forecasts at the Treasury’s last series of auctions, sparking concern that record spending is damping investor interest.
“The market is starting to react to growing fiscal deficits,” said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co., a St. Louis-based brokerage firm. “The last round of weak auctions are still fresh on everyone’s mind. This week’s auctions will be telling to see if sponsorship continues to decline.”
President Barack Obama and congress have increased U.S. marketable debt to a record $7.41 trillion to fund spending programs and service a deficit that his administration projects will probably expand to $1.6 trillion this year. Last year’s deficit was a record $1.4 trillion.
Four Percent Test
The yield on 10-year notes, which move inversely to prices, rose eight basis points on April 2 after the Labor Department reported U.S. companies added 162,000 workers in March, after a loss of 36,000 in February.
“A test of 4 percent is likely in the coming days,” Stamford, Connecticut-based William O’Donnell and Aaron Kohli, strategists at Royal Bank of Scotland Group Plc, wrote in a research note. “Look for a push back to upper yield ranges.”
Traders added to bets the Federal Reserve will raise interest rates after a report last week showed the fastest employment growth in three years.
Futures on the CME Group Inc. exchange show a 62 percent chance the Fed will increase the target for overnight lending between banks by at least a quarter percentage point by November, compared with 58 percent odds a month ago.
Discount Rate
The Fed Board of Governors may raise the discount rate to 1 percent from 0.75 percent at a meeting today, Andy Brenner, global head of emerging market fixed income at New-York based brokerage Guggenheim Capital Markets, wrote in a note to clients.
The board last increased the rate, which it charges to banks for direct loans, on Feb. 18, when it raised by a quarter percentage point to 0.75 percent. It said the move would encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs.
“Last week’s more positive data, the worry about this week’s supply and then potential that the Fed increases the discount rate today all add to continued bearish sentiment in the Treasury market,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Still, the prices have changed, but the underlying facts haven’t. The market should cheapen up some for the auctions, so we are buyers after the auction process.” Treasury 10-year notes will be attractive around 4.06 percent, Lyngen said.
Investors bid for 2.65 times the amount of 10-year TIPS offered at the last sale of the securities on Jan. 11, versus the average of 2.31 times at the past 10 auctions. Indirect bidders, which include foreign central banks, purchased 40.7 percent of the securities, versus the 10-sale average of 39 percent.
TIPS about broke even in March, while conventional Treasuries handed investors a 0.9 percent loss, according to indexes compiled by Bank of America Corp’s Merrill Lynch unit.
