U.S. 30-Year Treasury Up as Ultralong Bond Proposal Is Dealt a Setback

By Min ZengFeaturesDow Jones Newswires

The 30-year U.S. government bond strengthened on Wednesday after the Treasury suffered a setback in its idea of selling debt maturing in more than three decades.

Prices of other maturities softened, hurt by Wednesday's reports showing solid job growth in the private sector and robust expansion in the service industry.

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The data came ahead of the Federal Reserve's interest rate statement expected at 2 p.m. Wednesday. The central bank is widely expected to keep its key short-term policy rate unchanged after raising it by a quarter of a percentage point in March.

Some analysts say the Fed is likely to give a nod to some recent data weakness, but is likely to keep the door open for a possible rate increase in June.

The yield on the 30-year bond was 2.963%, according to Tradeweb, from 2.982% Tuesday. Yields fall as bond prices rise.

The yield on the benchmark 10-year Treasury note was 2.305%, compared with 2.296%. The yield on the two-year note, highly sensitive to the Fed's rate policy outlook, was 1.282%. It was 1.262% Tuesday.

The Treasury's Borrowing Advisory Committee, composed of representatives from some of the largest financial institutions that participate heavily in the bond market, told the Treasury that "the committee does not see evidence of strong or sustainable demand for maturities beyond 30 years."

The comment came as the Treasury released its latest quarterly refunding which contains details about how to finance its debt. The Treasury said in the statement that it would continue to study longer-term debt, and provide an update at a future quarterly refunding. The longest maturity the Treasury sells to investors now is 30 years.

"The door is not shut," but TBAC "makes the Treasury difficult to pursue the idea given that TBAC represents the voice of investors," said Priya Misra, head of global interest-rate strategy at TD Securities.

Ms. Misra said the biggest stumbling block is that demand for bonds maturing beyond 30 years, known as ultralong bonds, may be fickle.

The news reduced some concerns over a ramp-up of long-term bond issuance anytime soon and encouraged some investors to buy the 30-year bond, traders said.

The 30-year bond led a bout of selling Monday after Treasury Secretary Steven Mnuchin said that ultralong bonds "could absolutely make sense."

Traders said some investors on Wednesday unwound bets linked to the prospect of ultralong bond issuance. In doing so, they bought back the 30-year bond while sold other maturities.

As a result, the yield premium investors demanded to hold the 30-year bond relative to the 10-year note was 0.66 percentage point Wednesday. That was down from 0.687 percentage point a day ago which was the highest since December.

Stephen Stanley, chief economist at Amherst Pierpont, said the refunding release failed to live up to "the frenzy" generated by Mr. Mnuchin's comments.

Some traders said another boost for long-term debt was that the Treasury kept sizes of both 10-year and 30-year auctions steady. That contrasts with some expectations leading into the refunding release that the Treasury may lift the sizes of offerings to lay the ground work for the introduction of ultralong bonds.

The Treasury announced Wednesday that next week's offerings include $24 billion of three-year notes, $23 billion of 10-year notes and $15 billion of 30-year bonds.

Some traders and analysts still root for ultralong bonds.

Charles Comiskey, head of Treasury trading at Bank of Nova Scotia, said the Treasury should take advantage of the low interest rate environment to lock in relatively favorable funding costs.

Many other countries have sold ultralong bonds in recent years, including U.S. neighbors Canada and Mexico. Some firms also issued these bonds too.

Treasury bond supply pressure is likely to mount in coming years given the prospect of large fiscal stimulus including tax cuts and infrastructure spending. Meanwhile, the Federal Reserve is on the cusp of paring back its massive balance sheet which includes more than $2 trillion of Treasury bondholdings. These factors support the case for the Treasury to tap ultralong bond sales, say analysts.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

May 03, 2017 11:39 ET (15:39 GMT)