Bloomberg News

Treasuries Tumble on Lowest Five-Year Auction Demand in a Year

June 28, 2011

June 28 (Bloomberg) -- Treasuries fell, pushing five-year note yields up the most since January, as speculation Greece’s lawmakers will approve austerity measures cut demand at the $35 billion sale of the maturity to the lowest in a year.

Benchmark 10-year debt pared a monthly gain, pushing the yields above 3 percent on reduced concern Europe’s debt crisis will undermine the global economic recovery. The five-year note auction’s bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 2.59, the lowest since June 2010.

“It was a weak auction,” said Sergey Bondarchuk, an interest-rate strategist in New York at BNP Paribas SA, one of the 20 primary dealers obligated to participate in U.S. debt offerings. “People are not really bullish at these rates because if there are hints of improvement out of Greece, that could take yields higher.”

Yields on current five-year notes increased 13 basis points, or 0.13 percentage point, to 1.58 percent at 3:57 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent securities maturing in May 2016 dropped 5/8, or $6.25 per $1,000 face amount, to 100 25/32.

The five-year note yields earlier climbed 16 basis points, the most on an intraday basis since Jan. 5, and rose to 1.61 percent, the highest level since June 15. The yields fell yesterday to 1.35 percent, the lowest since Nov. 23.

“We may have reached levels that were just a little bit too rich for people,” said Scott Sherman, an interest-rate strategist in New York at the primary dealer Credit Suisse Group AG. “The market just balked.”

Ten-Year Yields

A drop of almost a point in the 10-year note pushed yields up 10 basis points to 3.03 percent after they dropped yesterday to 2.84 percent, the lowest level since Dec. 1. The yields have fallen two basis points in June.

At today’s five-year auction, the securities drew a yield of 1.615 percent, compared with the average forecast of 1.580 percent in a Bloomberg News survey of nine primary dealers.

Indirect bidders, an investor class that includes foreign central banks, purchased 37.6 percent of the notes, the lowest level since February. Direct bidders, non-primary dealers that place their bids directly with the Treasury, purchased 10.2 percent of the securities.

The offering is the second of three note auctions this week totaling $99 billion. A record low yield of 0.395 percent at yesterday’s $35 billion auction of two-year notes drew the lowest demand in more than three years from indirect bidders. The government is scheduled to sell $29 billion of seven-year notes tomorrow.

‘All-Time Low’

“Two-years were at an all-time low yesterday,” said John Fath, a principal at the investment firm BTG Pactual in New York. “Five-years are not at an all-time low but certainly are a lot less attractive than they were a couple of months ago with inflation ticking up.” Five-year notes drew a record low yield of 1.260 percent at the September offering.

The annual inflation rate accelerated in May to 3.6 percent, the fastest pace since October 2008, the Labor Department reported June 15.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, increased today to 2.30 percentage points, the highest level since May.

In Greece, lawmakers vote tomorrow on the package that’s needed before the cash-strapped nation can tap a fifth loan payment from last year’s 110 billion-euro ($157 billion) rescue. Failure to pass the government’s 78 billion-euro plan may lead to the euro area’s first sovereign default.

Strike in Greece

Unions began their fourth general strike of the year today, protesting Prime Minister George Papandreou’s five-year plan of budget cuts and asset sales. Police estimated about 12,000 people joined rallies and marches to Parliament in Athens on the first day of the 48-hour walkout.

Traders are betting the Federal Reserve will postpone raising borrowing costs from record lows to support the U.S. economy. The odds of a rate increase by April 2012 dropped to 28 percent, from 34 percent a month ago, futures contracts indicate. The central bank has held the target rate for overnight lending at zero to 0.25 percent since December 2008.

The Fed bought $4.62 billion of Treasuries due from August 2018 to May 2021 today as part of its $600 billion program of debt buying expiring this week.

Confidence among U.S. consumers unexpectedly fell in June to a seven-month low, the Conference Board reported. The New York research group’s index decreased to 58.5 from a revised 61.7 reading in May that was higher than previously estimated. The percentage of respondents expecting an increase in job availability fell to the lowest in 11 months.

Home values in 20 cities declined 4 percent in the 12 months to April, according to the S&P/Case-Shiller index. From March to April, values fell 0.1 percent on a seasonally adjusted basis, the smallest decline since July 2010.

--Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporters on this story: Susanne Walker in New York at; Daniel Kruger in New York at

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

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