Bloomberg News

Treasuries Fall as Rally in Stocks Saps 30-Year Auction Demand

June 09, 2011

June 9 (Bloomberg) -- Treasuries dropped, pushing 10-year note yields up from this year’s low, as a rally in stocks after the trade deficit narrowed discouraged demand at the $13 billion auction of 30-year bonds.

The securities drew a yield of 4.238 percent, compared with the average forecast of 4.216 percent in a Bloomberg News survey of nine of the Federal Reserve’s 20 primary dealers.

“The 30-year bond seems to be the big laggard this week, and equities are rising, which combined are weighing on the Treasury market,” said Kevin Flanagan, chief fixed-income strategist at Morgan Stanley Smith Barney in Purchase, New York.

Yields on 10-year notes increased six basis points, or 0.06 percentage point, to 3 percent at 5:16 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent security maturing in May 2021 dropped 16/32, or $5 per $1,000 face amount, to 101 3/32.

The 10-year note yields fell earlier to 2.92 percent, the lowest level since Dec. 3. A drop in the current 30-year bond pushed yields to 4.22 percent. Two-year note yields gained four basis points to 0.42 percent.

At today’s auction, indirect bidders, a class of investors that includes foreign central banks, bought 38.4 percent of the securities, compared with an average of 40.4 percent for the past 10 auctions.

Direct Bidders

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 9.3 percent, compared with the 10-auction average of 10.1 percent.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.63, compared with an average of 2.65 at the past 10 sales.

“We had a good week of auctions until here, which suggests demand for Treasuries on the very long end is weak relative to the rest of the curve,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, which as a primary dealer is obligated to participate in U.S. government debt offerings. “There is concern about holding paper that far out.”

At the $32 billion auction of three-year notes on June 7, indirect bidders bought 35.6 percent of the offering, the highest share since January. The government’s $21 billion sale of 10-year notes yesterday produced a yield of 2.967 percent, the lowest at such an auction since November.

Rally in Stocks

The Standard & Poor’s 500 Index rose for the first time in seven days, climbing 0.7 percent. Crude oil for July delivery gained 1 percent to $101.76 a barrel.

The U.S. trade deficit shrank 6.7 percent in April to $43.7 billion, the lowest since December, the Commerce Department reported in Washington. Exports rose to a record, while purchases of goods from Japan tumbled in the aftermath of the March earthquake and tsunami.

Treasury yields fell earlier as Philadelphia Fed President Charles Plosser said in London that the U.S. economy is going through a “soft patch.” If growth picks up in the next few months, it may speed up any exit of the Fed’s emergency stimulus. However, if the economy “continues to show weakness, that may push it off,” Plosser said.

U.S. initial jobless claims unexpectedly increased to 427,000 in the week ended June 4, from a revised 426,000 in the previous week, the Labor Department reported. The median forecast of 49 economists in a Bloomberg News survey was for a drop to 419,000 from a previously reported 422,000.

Bernanke’s View

Fed Chairman Ben S. Bernanke said in Atlanta on June 7 that record monetary stimulus is still needed to boost a “frustratingly slow” economic recovery.

Under the central bank’s $600 billion second round of quantitative easing, the Fed purchased $6.9 billion of debt maturing from February 2017 to May 2018 today. The program, also known as QE2, expires this month.

Futures contracts showed the likelihood of an increase in the fed funds target by the March 2012 meeting has fallen to 23 percent, from 26 percent odds a week ago. The target rate for overnight lending between banks has stayed at zero to 0.25 percent since December 2008.

“The Fed wants low yields, and they are going to get what they want,” said Russ Certo, a managing director and co-head of rates trading at Gleacher & Co. in New York. “There probably won’t be a third round of quantitative easing, but the Fed is still likely to keep monetary policy accommodative for longer.”

Pimco Holdings

Pacific Investment Management Co., the world’s biggest manager of bond funds, revised how it describes the holdings of its Total Return Fund to show that the flagship bond fund held U.S. government debt in May.

The $243 billion Total Return Fund managed by Pimco’s founder and co-chief investment officer, Bill Gross, increased its holdings of U.S. government debt to 5 percent last month from 4 percent in April, according to data on the Newport Beach, California, company’s website.

In the prior month’s posting, the category that was classified as government and government-related debt had shown negative holdings of 4 percent. The website showed an added category this month of swaps and liquid rates, with holdings of minus 9 percent.

--With assistance from Susanne Walker in New York. Editors: Dennis Fitzgerald

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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