Wednesday, 24 July 2013

Treasuries Drop on Growth Signs as Corporate Bond Spread Shrinks

By Anchalee Worrachate & Wes Goodman - Jul 24, 2013 2:24 PM GMT+0400
U.S. 10-year Treasuries dropped for a second day after gauges of euro area services and manufacturing beat analyst estimates, adding to signs global growth is recovering and damping demand for the safest assets.
Shorter-maturity notes slid as investors awaited a report that economists forecast will show new-home sales picked up in June, and before the government sells $35 billion of five-year debt. An auction of two-year securities yesterday attracted below-average demand. The extra yield investors require to buy corporate bonds instead of Treasuries shrank to a seven-week low as traders bet the Federal Reserve will maintain support for the economy even if it tapers debt purchases.
July 23 (Bloomberg) -- Kit Juckes, global strategist at Societe Generale SA, talks about the Federal Reserve's monthly bond buying and Chinese interest-rate liberalization. He speaks with Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)
July 9 (Bloomberg) -- Steven Major, global head of fixed-income research at HSBC Holdings Plc, talks about the outlook for U.S. treasuries, Federal Reserve monetary policy and the European Central Bank's long-term refinancing operation. He speaks with Anna Edwards and Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)
“The data out of the euro zone was relatively strong and there are signs the recovery in the U.S. is picking up speed,” saidPeter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “These numbers are planting some seeds of optimism that growth will surprise on the upside, and that is pushing Treasury yields higher.”
Benchmark 10-year yields rose four basis points, or 0.04 percentage point, to 2.54 percent at 6:19 a.m. New York time, Bloomberg Bond Trader data showed. The 1.75 percent note due May 2023 dropped 10/32, or $3.13 per $1,000 face amount, to 93 5/32. Yields fell to a record-low 1.38 percent on July 25, 2012.
A manufacturing index based on a survey of euro-area purchasing managers rose to 50.1 in July from 48.8 in June, London-based Markit Economics said today. Analysts in a Bloomberg survey predicted a reading of 49.1. A level of 50 is the dividing line between expansion and contraction. A report on services gave a reading of 49.6, versus analyst estimates for 48.7.

Treasury Returns

U.S. new-home sales rose for a fourth month in June, according to a Bloomberg News survey of economists before the Commerce Department reports the number at 10 a.m. today inWashington.
Treasuries are little changed this month, Bloomberg World Bond Indexes show, after falling 1.4 percent in June on concern the Federal Reserve was moving closer to reducing the pace of its bond-buying program.
Investment-grade company bonds gained 1.4 percent in July, climbing back from last month’s 2.8 percent loss, according to the indexes. Bonds in the gauge yesterday yielded 1.44 percentage points more than U.S. government securities, the smallest difference since June 3. The spread narrowed from 1.65 percentage points on June 25, which was the most since September.

Auction Preview

The five-year notes being auctioned today yielded 1.38 percent, versus an average yield of 1.429 percent at the last sale of the securities on June 26.
Investors bid for 2.45 times the amount of debt offered last month, the lowest level since September 2009.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 3.6 percent of the securities, the smallest amount since November 2009. The Fed’s 21 primary dealers including Goldman Sachs Group Inc. and Citigroup Inc. trade government securities with the central bank and are obliged to bid in Treasury auctions.
Indirect bidders, the investor class that includes foreign central banks, purchased 53 percent of the notes, the most since January 2010.
At a $35 billion two-year auction yesterday, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.08, compared with an average of 3.54 for the prior 10 sales.
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 74.05 yesterday, falling from this month’s high of 117.89 on July 5. The one-year average is 64.76.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was $247.6 billion yesterday. It has averaged $274.2 in July.
To contact the reporter on this story: Anchalee Worrachate in London at; Wes Goodman in Singapore at
To contact the editor responsible for this story: Paul Dobson at