Treasurys were the cheapest versus their international counterparts in seven years as a gauge of economic data showed figures are beating analysts’ forecasts by the most since February.
The U.S. is scheduled to sell $35 billion of five-year notes and $13 billion of two-year floating-rate debt on Wednesday, followed by $29 billion of seven-year securities Thursday. A two-year auction Wednesday drew close to the highest yield in three years after Federal Reserve Chair Janet Yellen said last week the central bank may raise interest rates from zero sooner than policy makers estimate if labor markets keep improving.
“Short-term and medium-term yields are likely to rise as Yellen shifts to a more neutral stance,” said Yoshio Takahashi, chief non-yen bond strategist at Barclays Plc in Tokyo. “The U.S. economy is continuing to recover.” The company is one of the 22 primary dealers that trade directly with the Fed.
The Treasury 10-year yield was little changed at 2.39 percent at 12:39 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 2.375 percent note maturing in August 2024 was 99 7/8.
The extra yield on the securities over their Group-of-Seven counterparts was 79 basis points at the close of trading yesterday, the widest since June 2007. A basis point is 0.01 percentage point.
Durable goods orders jumped by a record 22.6 percent in July, surpassing the median estimate of 8 percent growth in a Bloomberg News survey, the Commerce Department said yesterday. The Citigroup Economic Surprise Index climbed to 27.3, the highest level since Feb. 5. A positive number means data releases have been stronger than expected.
The U.S. economy expanded at a 3.9 percent annualized rate in the second quarter, according to a separate Bloomberg survey before the Commerce Department releases the revised figures tomorrow. The economy shrank 2.1 percent in the first three months of the year, the largest contraction since March 2009.
Yellen’s comments made in Jackson Hole, Wyoming, on Aug. 22, added to speculation the central bank is preparing to boost interest rates next year. The majority of Fed officials predict the central bank will start raising borrowing costs in 2015 based on forecasts it published in June.
Traders saw about a 55 percent chance the Fed will increase its benchmark rate from the current range of zero to 0.25 percent by July 2015, according to futures data compiled by Bloomberg yesterday. The odds were 48 percent a week earlier.
Yesterday’s two-year sale drew a yield of 0.53 percent, compared with 0.544 percent at the previous auction of the securities in July, which was the highest since May 2011.
The five-year notes being sold today yielded 1.67 percent in pre-auction trading. At the previous auction on July 29, investors bid for 2.81 times the amount available, the highest since March at the monthly sales.
Direct bidders, non-primary-dealer investors that place bids directly with the Treasury, bought 25.9 percent of the notes on offer, the most since December 2012. Indirect bidders, the investor class that includes foreign central banks, purchased 48.2 percent, the least in three months.
Inflation that’s holding in check will support Treasurys, said Hideaki Kuriki, a debt trader at Sumitomo Mitsui Trust Asset Management Co. in Tokyo.
“The Fed will raise the fed funds rate next year,” he said. “Treasury yields may go up but the room is limited because the inflation rate is still at a low level.” Kuriki said he’s keeping his Treasury holdings even with the benchmark he uses to gauge performance. Sumitomo Mitsui Trust oversees the equivalent of $46.7 billion in assets.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.15 percentage points. The average for the past decade is 2.20.
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