Treasury Yield Curve Near Record Before $13 Billion Bond Sale

By Cordell Eddings and Lukanyo Mnyanda
March 11 (Bloomberg) -- The difference in yields between 2- and 30-year Treasuries was near the highest on record as the U.S. prepares to sell $13 billion of bonds amid signs the global recovery is gaining momentum.

U.S. stock-index futures fell, indicating the Standard & Poor’s 500 Index may snap two days of gains. The dollar strengthened against most major currencies as the U.S. trade deficit unexpectedly narrowed in January as demand for foreign oil and automobiles dropped.

Investors are seeking higher interest rates on long-term U.S. government debt government as President Barack Obama borrows record amounts to sustain the recovery. Yields show investors added to bets on inflation for an eighth day, the longest run in almost a year.

“With the auction and data there is a little bit of uncertainty,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “We had strong Chinese data over night that has pushed us lower. We’ve also seen some setup for the auction. We’ve sold off a lot.”

The 30-year bond yield rose 1 basis point, or 0.01 percentage point, to 4.7 percent at 8:55 a.m. in New York, according to data compiled by Bloomberg. The 4.625 percent security due February 2040 declined 4/32, or $1.25 per $1,000 face amount, to 98 25/32.

Yield Curve

Thirty-year bonds yield 3.78 percentage points more than two-year notes. The gap reached 3.85 percentage points on Feb. 17, the most since at least 1980, according to data compiled by Bloomberg.

“We have so much supply in the long end of the curve that this could make it a more difficult auction,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “We could see yields going higher.”

The 30-year security will probably yield 4.75 percent by the end of June, compared with 1.1 percent for the two-year note, according to From. Similar-maturity German bunds will yield 4 percent and 1.2 percent, respectively, From said.

Obama has increased U.S. marketable debt to an unprecedented $7.41 trillion to fund a budget deficit the government predicts will swell to a record $1.6 trillion in the fiscal year ending Sept. 30.

Jobless Claims

Today’s auction of 30-year debt follows a sale of $21 billion of 10-year debt yesterday. The Treasury auctioned a record-tying $40 billion of three-year notes on March 9.

The trade gap decreased 6.6 percent to $37.3 billion from a revised $39.9 billion in December as Americans imported the fewest barrels of crude oil in a decade, Commerce Department figures showed today in Washington. Exports decreased 0.3 percent, the first decline since April. Separate data showed initial claims for U.S. jobless benefits fell by 6,000 to 462,000 last week.

S&P 500 futures expiring in March fell 0.4 percent to 1,141. Dow Jones Industrial Average futures lost 0.3 percent to 10,532 and Nasdaq-100 Index futures decreased 0.4 percent to 1,911.25.

China’s consumer prices rose 2.7 percent in February from a year earlier, the National Bureau of Statistics said in Beijing, compared with the 2.5 percent median estimate of 29 economists surveyed by Bloomberg News. Production rose 20.7 percent in the first two months of 2010, the most in more than five years.

The dollar rose 0.1 percent to $1.3645 per euro, compared with $1.3657 yesterday. The greenback traded at 90.48 yen from 90.52. The euro traded at 123.43 yen, from 123.62 yesterday.

Inflation Expectations

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of expectations for gains in consumer prices known as the breakeven rate, widened to 2.26 percentage points today, from 2.18 points a week ago. The average over the past five years is 2.16 percentage points. Germany’s 10-year breakeven rate is 1.83 percentage points.

Ten-year Treasuries yielded 58 basis points more than similar-maturity bunds today, up from 38 basis points on Jan. 21. Treasuries have made investors 1.4 percent this year, trailing a 2.1 percent return on German securities, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit.

The 30-year bonds scheduled for sale today yielded 4.72 percent in pre-auction trading. At the most recent auction of the securities on Feb. 11, investors bid for 2.36 times the amount offered, versus an average of 2.48 for the past 10 sales. Indirect bidders, the group that includes foreign central banks, bought 29 percent, versus an average of 42 percent at the previous 10 sales.

The 10-year yield, a benchmark for everything from mortgage rates to student loans, has climbed 82 basis points in the past 12 months to 3.73 percent as evidence accumulates that the global economy is recovering from the recession.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net