Treasuries fluctuated before the government sells $32 billion of two-year notes as part of $96 billion of coupon-bearing securities auctions this week.
Treasury 10-year notes are headed for their worst month since June, according to Bank of America Merrill Lynch Indexes. Janet Yellen, who is poised to succeed Ben S. Bernanke as Fed chairman, said Nov. 14 she wont remove stimulus too soon, even as the central banks bond buying comes to a close. The Fed will acquire $2.75 to $3.5 billion of Treasuries maturing from February 2021 to November 2023 today. The U.S. will sell $35 billion of five-year debt tomorrow and $29 billion of seven-year securities Nov. 27.
The buybacks push us up and when those are over well probably head down from the supply, said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA. Weve been in this range for the last few days.
The benchmark 10-year yield was little changed at 2.74% at 9:45 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.75% security maturing in November 2023 traded at 100 3/32. The yield rose as much as three basis points.
The previous two-year sale on Oct. 28 drew bids for 3.32 times the amount of notes available, the most since April at the monthly auctions. The securities to be sold today yielded 0.3% in pre-action trading.
Two-year notes have gained 0.36% this year, compared with a decline of 2.5% by the broader Treasuries market, according to Bank of America Merrill Lynch indexes.
Bank of America Corp. recommended investors take a short position on 10-year Treasuries at 2.78%, betting the yield will increase to 3.50% in the next three months, David Woo, global head of interest rates and currencies in New York, wrote in a note to clients.
The trade should particularly perform well if the Fed starts tapering asset purchases earlier than the March policy meeting, he said in the note dated yesterday. Investors should exit the position if yields drop to 2.40%, Woo wrote.
A cut in Fed bond purchases is on the table for the next policy meeting Dec. 17-18 depending on the performance of the economy, Fed Bank of St. Louis President James Bullard said last week. Bullard votes on monetary policy this year.
Economists say reports this week will show pending home sales, house prices and consumer confidence all increased, while orders for durable goods fell, based on Bloomberg News surveys.
While the Feds pledge to keep down interest rates is limiting the decline in shorter-maturity Treasuries, economic optimism is pushing down longer-dated debt.
The difference in yield between five- and 10-year notes widened to the most in two years last week after the Labor Department said initial claims for jobless insurance fell more than economists forecast. The spread was 1.40 percentage points after expanding to 1.45 percentage points Nov. 21, the most since August 2011.
The Fed has been emphasizing the tapering of bond purchases isnt a tightening of monetary policy. Bernanke said last week the benchmark interest rate will probably stay low long after the purchases end.
The central bank has held its target for overnight lending between banks, the federal funds rate, in a range of zero to 0.25% for almost five years.
The $11.7 trillion Treasury market is betting on history not repeating as the Fed moves closer to reducing stimulus.
From futures to derivatives, traders dont see the central bank raising its benchmark interest rate from a record low until nine months after policy makers end their monthly bond purchases of $85 billion, or late 2015. In September, when the Treasury market was tumbling in the midst of its worst year since 2009, the projected gap was two months, according to Barclays Plc.
When Bernanke first discussed ending purchases May 22, there was a consensus opinion that Oh my God, this is the end, and that an increase to the federal funds rate would be right on the heels of that last purchase, said Gregory Whiteley, who manages government debt investments at Los Angeles-based DoubleLine Capital, which oversees $53 billion. That is not the consensus any longer, he said in a Nov. 19 telephone interview.
Investors see an 11% chance policy makers will increase the target to 0.5% or more by January 2015, based on data compiled by Bloomberg from futures contracts.
The U.S. bond market will be shut Nov. 28 for the Thanksgiving holiday, according to the Securities Industry and Financial Markets Association website. SIFMA recommended a 2 p.m. close in New York on Nov. 29.