Bloomberg News

Treasury Notes Drop Before Auction on Bets Greece Plan Will Pass

June 28, 2011

June 28 (Bloomberg) -- Treasury notes declined before today’s $35 billion auction of five-year securities on speculation Greece’s lawmakers will approve austerity measures to assure a financial bailout.

Benchmark 10-year debt pared a monthly gain on reduced concern Europe’s sovereign-debt crisis will undermine the global economic recovery. A record low yield at yesterday’s auction of two-year notes drew the lowest demand in more than three years from an investor class that includes foreign central banks.

“The market is hanging on every statement for the next couple of days until this vote takes place,” said James Combias, head of Treasury trading in New York at Mizuho Securities USA Inc., one of 20 primary dealers that trade with the Federal Reserve. “We expect the market to be volatile until we get clear direction stemming from Greece. The market will have to make room for the supply coming. It would make sense that they would have to cheapen up the market.”

Yields on current five-year notes increased seven basis points, or 0.07 percentage point, to 1.52 percent at 11:25 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent securities maturing in May 2016 dropped 10/32, or $3.13 per $1,000 face amount, to 101 3/32.

The 10-year note yields increased five basis points to 2.98 percent after falling yesterday to 2.84 percent, the lowest level since Dec. 1. The yields have fallen nine basis points in June in what would be a third monthly decrease. Two-year note yields gained three basis points to 0.45 percent today, while 30-year bond yields were little changed at 4.29 percent.

Long Bonds

Thirty-year bonds were the worst-performing Treasuries yesterday, increasing 11 basis points, the most since Jan. 5. The difference, or spread, between two- and 30-year yields widened yesterday to 3.91 percentage points, the most in three months, before narrowing to 3.86 percentage points today.

Two-year notes have returned 0.2 percent this month, compared with 1.3 percent for five-year debt, 1.3 percent for 10-year securities and a 0.8 percent loss for 30-year bonds, according to indexes compiled by Bank of America Merrill Lynch.

The five-year Treasury notes being auctioned today yielded 1.535 percent in pre-auction trading, versus 1.813 percent at the prior sale on May 25. Investors bid for 3.20 times the amount offered last month, more than the average of 2.83 for the past 10 auctions.

“Fives have gotten really rich,” said David Ader, head of government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “We can get an auction concession.”

Indirect Bidders

Indirect bidders, the investor class that includes foreign central banks, bought 47.1 percent of the notes in May, versus the 10-sale average of 41.6 percent. Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 8.9 percent, the lowest in three months.

At yesterday’s $35 billion two-year note auction, indirect bidders purchased 22 percent of the securities, the lowest since February 2008. The government will conclude this week’s note sales with tomorrow’s $29 billion offering of seven-year debt.

Traders are betting the Fed will postpone raising borrowing costs from record lows to support the 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 cut the target to a range of zero to 0.25 percent in 2008 and has promised to keep it low for an “extended period.”

Home Prices Drop

Home prices decreased in the year ended April by the most in 17 months, showing the housing market remains an obstacle for the U.S. recovery.

The S&P/Case-Shiller index of property values in 20 cities fell 4 percent from April 2010, the biggest drop since November 2009, the group said today in New York.

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.

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.

In Greece, unions began their fourth general strike of the year, 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.

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.

--Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporter on this story: Susanne Walker in New York at

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

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