Treasury Five-Year Notes Rise as Yellen to Be Named Fed Chairman

Treasury five-year notes advanced, erasing a loss from yesterday, after a White House official said Janet Yellen will be nominated to head the Federal Reserve, fueling bets the central bank will keep borrowing costs low.

One-month bill rates fell after climbing to the highest level for a benchmark security since 2008 yesterday as the U.S. government approaches the Oct. 17 deadline to raise its debt ceiling. The difference between what banks and the Treasury pay to borrow money for one month, known as the TED spread, fell to minus 16 basis points yesterday, the first time it has inverted since Bloomberg started collecting the data in 2001. The U.S. will auction $21 billion of 10-year notes today.
“Yellen’s nomination has helped Treasuries so far today,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The five-years are rallying the most. The belly of the curve -- the five-to-seven years -- tend to perform well in a rally.”

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The U.S. five-year yield fell two basis points, or 0.02 percentage point, to 1.40 percent at 6:21 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.375 percent note due in September 2018 rose 1/8, or $1.25 per $1,000 face amount, to 99 3/4. The benchmark 10-year yield dropped one basis point to 2.62 percent.
Rates on Treasury bills due on Oct. 24 dropped three basis points to 0.29 percent after climbing to 0.32 percent yesterday. They were negative as recently as Sept. 27.

Annual Loss

Fed Vice Chairman Yellen would succeed Chairman Ben S. Bernanke, whose term ends Jan. 31, after he cut interest rates to a record of almost zero in 2008 and began a bond-buying program to put downward pressure on borrowing costs. Obama will announce the nomination at 3 p.m. in Washington, a White House official said in an e-mailed statement.
“She could keep quantitative easing and keep rates low for an extended period,” which helps short-term debt, said Hideo Shimomura, who helps oversee about $60.3 billion as chief fund investor at Mitsubishi UFJ Asset Management Co. in Tokyo. “She will take over Bernanke’s style. The initial reaction is that inflation may rise,” which hurts long bonds, he said.
Treasuries (BUSY110) due in one to 10 years have fallen 1.2 percent in 2013, while those maturing in a decade or longer tumbled 9.2 percent, based on Bloomberg World Bond Indexes.
Shorter-maturity U.S. notes tend to follow what the Fed does with its target for overnight lending between banks, while longer-dated bonds are more influenced by the inflation outlook.

Inflation Outlook

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 little changed at 2.18 percentage points. Annual consumer-price inflation was 1.5 percent in August.
In addition to today’s 10-year auction, the U.S. plans to sell $13 billion of 30-year bonds tomorrow. It auctioned $30 billion of three-year securities yesterday.
At the previous 10-year sale on Sept. 11, investors bid for 2.86 times the amount offered, the most since March at the monthly auctions. Yesterday’s three-year note drew bids for 3.05 times the amount available, the smallest amount since June.

Bill Sale

The U.S. sold $30 billion of four-week bills yesterday at a rate of 0.35 percent, versus zero percent as recently as last month. Three-month bill rates climbed as high as 0.1318 percent today after dropping to negative 0.0101 percent on Sept. 27.
The extra yield investors get for buying one-month securities instead of 91-day securities reached 28.9 basis points yesterday, the biggest difference since March 2008, according to closing-market data. It’s usually the other way around. In 2013, investors have been able to earn an extra basis point on average by buying the longer-dated security.
Two years ago, one-month bill rates climbed to 0.17 percent in the days before the Aug. 2, 2011, deadline set by the Treasury to avoid a default approached. They traded at 0.015 percent in December 2012 before a year-end trigger would force automatic spending cuts and tax increases.
The three-month rate climbed to 0.09 percent before the August 2011 deadline, and it rose as high as 0.081 percent in the week before Dec. 31, 2012.

SOURCE : http://www.businessweek.com/news/2013-10-08/treasury-five-year-notes-gain-as-yellen-to-win-fed-nomination