Treasury Yield Gap Narrows ahead of $16 Billion 30-Year Auction

US Treasury STock market

Not since 2009 has there been such a narrow gap between the United States 3 and 30-year Treasury yields. At this level, demand for longer-maturity debt ahead of a bond auction becomes evident.

Treasury Department 30-year securities rallied as inflation remains in check, in spite of economic expansions. Now, the Treasury is scheduled to sell $16 billion of these securities. As reported by the Bank of America Merrill Lynch indexes, in 2014, securities returned 21% while three-year notes saw a gain of 1%. As initial claims for unemployment benefits in the US surpassed forecasts, Treasuries gained.

The short-end is driven primarily by Fed expectations whereas the long-end is driven by concerns pertaining to flight-to-safety. As stated by Jan Von Gerich, fixed-income analyst at Nordea Bank AB in Helsinki, also driving the long-end is how much people think rates will eventually be increased by the Fed. If preparing for challenges, people anticipate a flattening curve and an outperforming long-end.

Falling three basis points of 0.03% is 30-year yields, to 3.07%. Pricing for the 3.125% bond due in August of 2044 climbed 19/32, equal to $5.94 per $1,000 face value to 100 31/32. Also dropping was 10-year note yields, down two basis points to 2.35%.

Increased demand from yield investors to own 30-year bonds opposed to three-year notes also fell one basis point or 0.01% point to 209 basis points. In October, the spread hit 206 basis points, making it the narrowest difference since January of 2009.

Yusuke Ito, senior fund manager of Mizuho Asset Management Co said he expected to see continued downward pressure on yields. Responsible for overseeing $34.6 billion, he added that pressures specific to inflation are decreasing and that throughout this year, Mizuho Asset has been conducting investigations in the longest debt.

The difference between yields for US 10-year notes versus similar maturity Treasure Inflation Protection Securities changed little at 1.92% points, hitting low in October at 1.83% points, something not seen since the middle of last year. In looking at the preferred gauge of inflation used by the Feds, it did not reach the targeted 2% for over two years.

Treasury experts agree the US economy is currently strong enough to push the Fed to increase interest rates in 2015, creating a reason not to buy. Yesterday’s $24 billion 10-year sale, which gauges demand, was 2.52, matching the lowest level since August of last year.

Although notes sold at a yield of 2.365%, the smallest since June 2013, they surpassed the forecast from 8 of 22 primary dealers associated with the Fed prior to auction at 2.356%. In addition, with the $26 billion three-year-sale held November 10, the bid-to-cover ratio dropped from 3.42 to 3.18 last month.

Following the 10-year auction, Peter Jolly, head of market research at National Australia Bank said there is some resistance in rushing into this longer bond. While the US economy remains stable, yields are still lower than wanted, and more than likely, interest rates will be raised by the Federal Reserve.

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Don Miller

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