U.S. 3-Year Yields Rise as Europe Concern Eases, U.S. Sells Debt
July 12, 2011, 2:55 PM EDTBy Cordell Eddings and Susanne Walker
July 12 (Bloomberg) -- Treasury three-year note yields rose from the lowest level since November as concern eased that Europe’s sovereign debt crisis is worsening and the U.S. sold $32 billion of the debt in the first of three sales this week.
The auction, the first since the Federal Reserve completed its $600 billion of bond purchases in June, drew the highest demand from direct bidders, or non-primary dealer investors, since December. Ten-year notes were little changed as minutes of the Fed’s last meeting showed policy makers disagreed on whether further stimulus will be needed if the economy remains weak.
“There was strong demand across the board, given what’s going on around the world and the concession we had in the bond market,” said James Combias, New York-based head of Treasury trading at Mizuho Securities USA Inc., one of the 20 primary dealers that trade with the Fed. “It makes for people to feel fairly comfortable buying these notes. The auctions tomorrow and Thursday are longer duration instruments, and we may see much more volatility.”
The yield on the current three-year note rose two basis points, or 0.02 percentage point, to 0.63 percent at 2:31 p.m. in New York, according to Bloomberg Bond Trader prices. It fell six basis points earlier to 0.55 percent, the lowest since Nov. 9. The 0.75 percent security due in June 2015 fell 2/32, or 63 cents per $1,000 face amount, to 100 11/32. Ten-year yields were little changed at 2.92 percent.
Today’s sale drew a yield of 0.670 percent, compared with forecast of 0.680 percent in a Bloomberg News survey of 10 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.22, versus an average of 3.14 for the past 10 sales.
First Since QE2
“The auction was especially good considering it was the first auction since the end of QE2,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., referring to the Fed’s Treasury purchases under the second round of quantitative easing, The firm is obliged as a primary dealer to bid in U.S. debt auctions.
Indirect bidders, an investor class that includes foreign central banks, bought 34.5 percent of the notes sold today, compared with an average of 34.7 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 16.5 percent, compared with an average of 12.8 percent for the past 10 auctions.
The June offering of the debt drew a yield of 0.765 percent. The Treasury is scheduled to sell $21 billion in 10- year debt tomorrow and $13 billion of 30 year bonds on July 14.
FOMC Minutes
Minutes released today of the central bank’s Federal Open Market Committee meeting June 21-22 showed some officials said the Fed “might have to consider providing additional monetary stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run.” Others thought the next focus might be “steps to begin removing policy accommodation” as conditions improve, the minutes showed.
Today’s auction came three weeks before the Aug. 2 debt- ceiling deadline as Republican and Democratic congressional leaders try to agree on cutting deficits and raising the government’s $14.3 trillion limit on borrowing.
President Barack Obama said yesterday at a White House press conference he’ll continue to press congressional leaders for “the largest possible deal” on a package of deficit cuts in the negotiations.
Obama said he won’t sign a short-term extension of the debt limit and plans to continue meeting with members of Congress every day until an acceptable agreement is reached.
Sovereign-Debt Crisis
Treasuries climbed earlier as investors sought safety after a meeting of euro-area finance ministers yesterday failed to quell the region’s escalating sovereign-debt crisis, which began in Greece.
Riskier assets cut losses as former Bank of England policy maker Willem Buiter said the European Central Bank will revive its bond-buying program to safeguard this week’s auction of Italian bonds.
“The ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday,” Buiter, now chief economist at Citigroup Inc., told reporters in London. “If the ECB doesn’t come in, the Italian bond auction is likely to fail.”
The Standard & Poor’s 500 Index rose 0.4 percent after falling earlier as much as 0.3 percent. The MSCI World Index of stocks was little changed after earlier tumbling 1.3 percent.
Spanish and Italian government 10-year bond yields reached 13-year highs before erasing today’s increases and falling as European Union Economic and Monetary Affairs Commissioner Olli Rehn said a consensus had been reached on private investors’ role in solving Greece’s debt crisis.
The U.S. yield curve, the difference between two- and 10- year Treasury note yields, flattened for a sixth straight day before the sale, the longest since May. It decreased to 2.54 percentage points, down from a high this year of 2.93 percentage points on Feb. 7.
--Editors: Greg Storey, Dave Liedtka
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
