Bloomberg News

U.S. Two-Year Yields Rise From Almost Record Low Before Auction

June 27, 2011

June 27 (Bloomberg) -- Treasury two-year note yields rose from almost a record low before today’s $35 billion auction of the securities on bets Greece’s lawmakers will approve austerity measures needed to secure a bailout.

Yields on 10-year notes increased for the first time in four days as the German government welcomed proposals from French banks and insurers on voluntary participation in a roll-over of Greek debt. Four-week bill rates traded negative today for the first time in more than a year on quarter-end buying amid a shrinking supply of the securities.

“At these levels, we are really pricing for a complete disaster,” said Michael Cloherty, head of U.S. rates strategy for fixed-income and currencies in New York at Royal Bank of Canada, one of the 20 primary dealers obligated to participate in U.S. government debt offerings “Things are bad in Europe and the economy is much weaker than we’d like it to be here, but we are not at a point where buying the two-year at 35 basis points makes sense.”

Yields on two-year notes gained three basis points, or 0.03 percentage point, to 0.36 percent at 11:22 a.m. in New York, according to Bloomberg Bond Trader prices. The 0.5 percent security maturing in May 2013 fell 2/32, or 63 cents per $1,000 face amount, to 100 1/4.

The two-year note yields dropped on June 24 to 0.32 percent, the lowest level since Nov. 4, when they reached a record low 0.3118 percent.

Ten-Year Yields

Yields on 10-year notes advanced two basis points to 2.88 percent after falling earlier today to 2.84 percent, the lowest level since Dec. 1. The rate on the four-week bill was negative 0.005 percent, the lowest since January 2010. The yield on the 30-year bond climbed as much as five basis points to 4.24 percent, the highest level since June 21.

Greek lawmakers begin a three-day debate today on the 78 billion euro ($111 billion) of austerity measures, with a vote expected to be on June 29. Failure to pass the plan may lead to the euro area’s first sovereign default.

“Even though the vote will be tough, the market still thinks it will go through,” said Michael Franzese, managing director and head of trading at Wunderlich Securities Inc. in New York. “The world’s not coming to an end.”

At a press conference in Paris, President Nicolas Sarkozy said French banks and insurers proposed rolling over 70 percent of their holdings of Greek debt on a voluntary basis.

‘Private Sector’

“The German government welcomes it when proposals come from the private sector, including those on private-creditor participation that are now coming out of France,” the German Finance Ministry spokesman Martin Kreienbaum told reporters in Berlin today.

In the U.S., the government is scheduled to sell $99 billion of notes this week starting with today’s offering of two-year debt. The Treasury plans to sell $35 billion of five-year securities tomorrow, followed by a $29 billion sale of seven-year notes on June 29.

The two-year debt scheduled for sale today yielded 0.38 percent in pre-auction trading, compared with 0.56 percent at the previous sale of the securities on May 24.

Investors bid for 3.46 times the amount of debt on offer last month, compared with an average of 3.39 for the past 10 sales. Indirect bidders, which include foreign central banks, bought 31.3 percent of the notes. Direct bidders, non-primary dealers buying for their own accounts, purchased 19.1 percent, the most this year.

Fed Debt Buying

The Federal Reserve purchased $4.578 billion of securities maturing from June 2015 and September 2016 today as part of its $600 billion program of debt buying expiring this week.

The central bank said on June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system.

U.S. consumer spending unexpectedly stagnated in May after an increase of 0.3 percent in the previous month, the Commerce Department reported. The median forecast of 70 economists in a Bloomberg News survey was for a 0.1 percent increase.

Treasuries have returned 1 percent in the past month as of the end of last week, extending their gain this year to 3.6 percent, according to indexes compiled by Bank of America Merrill Lynch.

“Right now It’s time to stay out of the way rather than taking a lot of the risk in the fixed-income market,’’ RBC’s Cloherty said. “If we do get any sign that the economic numbers aren’t as bad as people are assuming, we could see a significant rise in yields.’’

--With assistance from Daniel Kruger and John Detrixhe in New York and Keith Jenkins in London. Editors: Dennis Fitzgerald

To contact the reporters on this story: Susanne Walker in New York at; Cordell Eddings in New York at

To contact the editor responsible for this story: Dave Liedtka at

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