Bloomberg News

Treasuries Drop as Third U.S. Note Auction Produces Weak Demand

June 29, 2011

June 29 (Bloomberg) -- Treasuries fell as a third government note auction this week produced poor demand after Greek lawmakers passed the first part of an austerity plan needed to maintain access to bailout funds.

Yields on seven-year notes rose to the highest level this month after the $29 billion auction of the securities drew the lowest participation from a class of investor including foreign central banks in more than two years. Yields on two-year notes touched 0.50 percent a day before the Federal Reserve’s $600 billion second round of quantitative easing concludes.

“It looks like a disappointment,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s private wealth management unit in New York. “We have three auctions in a week that have fallen below expectations. It’s not a good sign considering QE2 ends tomorrow.”

Yields on 10-year notes increased nine basis points, or 0.09 percentage point, to 3.12 percent at 1:25 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 fell 23/32, or $7.19 per $1,000 face amount, to 100 2/32. Yields touched 3.13 percent, the highest level since May 26.

The current seven-year note yields gained 11 basis points to 2.41 percent after touching 2.42 percent, the highest level since May 31. Two-year note yields were little changed at 0.47 percent today after rising to 0.50 percent, the highest level since May 27. The yields touched 0.32 percent on June 24, within a basis point of the all-time low of 0.3118 percent, which was reached Nov. 4.

Seven-Year Auction

At today’s auction, the securities drew a yield of 2.430 percent, compared with the average forecast of 2.420 percent in a Bloomberg News survey of eight of the 20 primary dealers obliged to participate in U.S. debt offerings. The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 2.62, compared with 3.24 last month and an average of 2.89 at the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 32.2 percent of the notes, the lowest level since March 2009. That compares with an average of 50.1 percent for the past 10 sales.

Direct bidders, non-primary dealers that place their bids directly with the Treasury, purchased 11.8 percent of the securities, compared with 13 percent at the previous sale and an average of 8.1 percent at the past 10 offerings.

Auction Demand

The offering is the last of three note auctions this week totaling $99 billion. The government’s $35 billion auction of five-year securities yesterday drew the lowest bid-to-cover ratio in a year. A record low yield of 0.395 percent at the $35 billion offering of two-year notes on June 27 drew the lowest demand from indirect bidders in more than three years.

In Greece, Prime Minister George Papandreou clinched enough votes to pass the first part of an austerity plan aimed at meeting European Union aid requirements and staving off default for his debt-laden nation.

After gaining 155 votes in the 300-seat parliament, Papandreou is now in a position to secure a bill setting out the strategy for a 78 billion-euro ($112 billion) package of budget cuts and asset sales that is the condition for further rescue funds. The vote, overshadowed by a 48-hour strike, became the target of protests in which police fired tear gas at demonstrators outside the parliament.

Quarterly Return

As of yesterday, U.S. debt was headed for its largest quarterly return in a year as a slowing economy and Europe’s sovereign-debt crisis boosted demand for the safest assets. U.S. debt had returned 2.8 percent since the end of March, the most since the second quarter of 2010, according to indexes compiled by Bank of America Merrill Lynch.

The number of Americans signing contracts to buy previously owned homes rose 8.2 percent in May, the National Association of Realtors reported. The median forecast of 36 economists in a Bloomberg News survey was for a 3 percent gain.

“We need a constant flow of bad news to maintain yields at these low levels,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “If we don’t get it, then supply becomes a struggle.”

The central bank purchased $2.456 billion in Treasuries due from February 2029 to February 2041 today to support the economy. The Fed plans to purchase $4 billion to $5 billion of notes due from December 2016 to June 2018 tomorrow as the second round of quantitative easing ends.

Morgan Stanley Wager

Morgan Stanley, the firm targeting a 2 percent market-share gain in fixed-income trading this year, was burned by a wager on U.S. inflation expectations in the second quarter, three people informed of the dealings said.

The bank’s interest-rates trading group lost at least tens of millions of dollars on the trade, which the firm has been unwinding, two of the people said, declining to be identified because the transaction isn’t public. Mary Claire Delaney, a Morgan Stanley spokeswoman, declined to comment.

Traders at the bank bet that inflation expectations for the next five years would rise in Treasury markets, while forecasts for the next 30 years would fall, according to two of the people. Such wagers involve paired purchases and short sales of Treasuries and Treasury Inflation Protected Securities in both maturities.

The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices over the life of the debt know as the break-even rate, increased to 2.37 percentage points, the highest level since May.

--With assistance from Michael J. Moore in Washington, Jody Shenn and Christine Harper in New York and Maria Petrakis in Athens. Editors: Dennis Fitzgerald, Paul Cox

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

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

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