By Cordell Eddings and Susanne Walker April 24 (Bloomberg) — Treasuries fell for the first time in three weeks as the U.S. prepared to sell a record amount of notes and reports showing gains in durable goods orders and new home sales added to signs the recovery is sustainable. The yield difference between 2- and 10-year notes narrowed the most this year before the Federal Open Market Committee meets to discuss interest rates. Greece, struggling with the European Union’s biggest budget deficit, called for activation of a financial lifeline of as much as 45 billion euros ($60 billion). “We’ve had a dramatic flattening of the curve as the front end has sold off ahead of next week’s supply and better than expected economic data weighed on Treasuries,” said Russ Certo , a managing director and co-head of rates trading at Broadpoint Capital Inc. in New York. “Next week the market will look to supply and the FOMC for direction.” Two-year note yields gained 11 basis points on the week, or 0.11 percentage point, to 1.07 percent, according to BGCantor Market Data. That’s the biggest move since the last week of December. The 10-year note yield rose 5 basis points, or 0.05 percentage point, to 3.81 percent. The yield curve narrowed 7 basis points on the week, also the most since the last week of December, to 2.75 percentage points. The spread reached a record 2.94 percentage points on Feb. 18. ‘Real Recovery’ The 2.8 percent increase in bookings for durable goods excluding cars and aircraft was four times larger than the median forecast of economists surveyed by Bloomberg News, Commerce Department figures showed yesterday. Sales of new homes climbed 27 percent, the most since April 1963, to an annual pace of 411,000, a separate report showed. “A V-shaped recovery seems to be taking place and people are feeling like we are having a real recovery,” said Thomas L. di Galoma , head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. The U.S. will sell $44 billion in two-year notes, $42 billion in five-year securities, $32 billion in seven-year debt and $11 billion in five-year Treasury Inflation Protected Securities next week, the Treasury announced on April 22. President Barack Obama has boosted marketable U.S. debt to a record $7.76 trillion, Treasury figures show. Obama’s proposed budget calls for a $1.6 trillion deficit in 2010, compared with last year’s record $1.4 trillion shortfall . Issuance Reduction The U.S. could reduce issuance of coupon debt by around $90 billion by the end of the 2010 fiscal year in September, according to primary dealer Royal Bank of Scotland Plc. “We expect the first announcements this quarter,” William O’Donnell , U.S. government bond strategist at RBS in Stamford, Connecticut, wrote in a note to clients on April 20. “This should be mildly positive for bond prices as the Treasury supply cuts will reduce the risk of a ‘crowding-up’ in rates when private sector debt issuance normalizes.” RBS forecasts a $1.1 trillion deficit in the 2011 fiscal year, which “could result in more than $650 billion in coupon issuance cuts,” O’Donnell wrote. The Treasury asked bond dealers about the best way to shrink the size of its long-term debt auctions as economy recovers and the government no longer needs to expand its borrowing calendar. ‘National Need’ “Debt managers are contemplating a reduction in coupon sizes as the fiscal outlook improves. How should Treasury accomplish such a reduction?” the Treasury asked in a quarterly survey released today. Ten-year yields have fallen from the 4.01 percent they reached on April 5, the highest level since October 2008, as concern Greece might default on its debt had spurred investors to buy what they consider the safest assets even as the government sold record amounts of securities. Greek Prime Minister George Papandreou yesterday said “it is a matter of national need to ask officially” for the activation of the European Union-led aid mechanism. The appeal for help from the European Union and International Monetary Fund follows a surge in borrowing costs to what Papandreou called unsustainable levels that undermine efforts to cut a budget deficit of more than four times the EU limit. The Federal Open Market Committee is scheduled to release its interest rate decision on April 28. Policy makers, who cut its target rate to a range of zero to 0.25 percent in December 2008, last month repeated a pledge to keep borrowing costs “exceptionally low” for an “extended period.” Second-Guessing “The FOMC meeting will not show any material digression from the methodical wait-and-see approach to policy,” Eric Green , chief of U.S. rates research and strategy at Toronto Dominion Bank wrote in a note to clients. “Economic fundamentals will keep the fed on the sidelines until 2011.” Futures on the CME Group Inc. exchange show a 66 percent chance the Fed will raise its target rate for overnight bank lending by at least a quarter-percentage point by its December meeting, down from 75 percent odds a month ago. The yield curve narrowed to an almost one-month low on April 21 after the Bank of Canada at its policy meeting the previous day said the time for keeping its policy rate at a record low 0.25 percent “is passing.” An interest-rate increase would make Canada the first in the Group of Seven nations to raise borrowing costs. “People are starting to second-guess just how quickly the Fed might move given the Bank of Canada story, which is weighing on the front end,” said George Goncalves , head of interest-rate strategy at Nomura Holdings Inc., a primary dealer. “The long end is benefiting with next week’s auctions and the reach out the curve for yield.”
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Treasuries Fall on Economic Recovery Signs, $129 Billion in Bond Auctions
