Bonds turn negative as selling persists

By Karen Brettell

NEW YORK (BestGrowthStock) – U.S. Treasury prices fell on Wednesday as traders warned that selling pressure from investors holding long positions could continue to roil the market while investors also price in greater expectations of economic growth.

The fall erased earlier gains, when prices were buoyed by some buyers coming in at relatively more attractive yields and after a Moody’s Investors Service warning on Spain’s sovereign credit rating renewed focus on stress in the eurozone region.

“We’re still seeing selling overall and it’s from a lot of customers,” said Tom Tucci, head of government bond trading at RBC Capital Markets in New York.

Selling from investors unwinding long Treasury positions taken before the Federal Reserve announced its latest bond purchase program in early November has weighed on the market in recent weeks, with intermediate-dated bonds faring the worst.

Investors had bet that those notes would rally as the Fed focused the majority of its buying in that part of the curve. Instead, the debt has sold off due to the largely one-sided nature of trades heading into the statement.

The proportion of bonds offered for the Fed’s purchase of 4.5 year to 5-year notes fell on Wednesday as investors were more reluctant to part with the debt, which has cheapened relative to other maturities in the volatile sell-off.

“Investors don’t want to sell the cheapest securities on the curve that have really cheapened up because of dislocations into year-end, but that should outperform past year-end,” said Igor Cashyn, interest rate strategist at Morgan Stanley in New York.

The Fed on Wednesday purchased $6.8 billion of Treasuries from $13 billion offered in the auction, which was a record low offer-to-cover ratio of 1.9 times, Morgan Stanley said.

Five-year notes were little changed Wednesday afternoon at yields of 2.09 percent, which is double their 1 percent yield on November 4.

The benchmark 10-year note was down 06/32 in price to yield 3.51 percent. This compares with 3.29 percent on November 4.

Thirty-year bonds fell 28/32 in price to yield 4.59 percent, up from 4.06 percent on November 4. The Treasury yield curve also steepened, with the spread between 2-year notes and 30-year bond yields reaching a record 395 basis points.

Foreign investors have begun cutting their holdings of U.S. Treasuries and the inclination to shed the low-yielding assets is likely to grow as risk appetite improves and managers seek better returns elsewhere.

ADJUSTING TO GROWTH

Many traders and investors anticipate Treasury yields are likely to continue to rise, even after the dramatic sell-off, on higher growth expectations. The pace of the move may slow, however, and yields may stabilize or move lower before starting another leg higher, they said.

“I think people have failed to identify the amount of stimulus that is going to go on in the economy,’ said RBC’s Tucci.

Bonds yields continue to trade lower than historical comparisons when accounting for growth expectations, he said.

For example, five-year note yields have traditionally traded with yields of just under 4 percent over the past 10 years when GDP has grown at the currently projected rates of 3 percent to 3.5 percent, Tucci said.

Those yields are likely higher than where five-years should trade today given low inflation and the low Federal Funds rate, he said. Nonetheless, “with the selling I’m seeing I think people have to discount further until people feel there’s a better value in the market,” Tucci said.

(Editing by Dan Grebler)

Bonds turn negative as selling persists