Bloomberg News

Treasuries Erase Losses on Debt-Limit Concern, Auction Demand

July 13, 2011

July 13 (Bloomberg) -- Treasuries erased losses amid concern Congress will fail to raise the federal debt limit and after government debt’s refuge appeal bolstered demand at a U.S. auction of $21 billion in 10-year notes.

The notes yielded 2.918 percent, compared with the average forecast of 2.951 percent in a Bloomberg News survey of seven of the Federal Reserve’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.17, versus an average of 3.11 for the past 10 sales. Treasuries fell before the sale as Fed Chairman Ben S. Bernanke left the door open to more stimulus. They rose yesterday on concern Europe’s debt crisis was worsening.

“It was a great auction,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc. As one of the 20 primary dealers, the firm is obligated to bid in Treasury offerings. “It shows real demand at these levels below 3 percent. People are concerned about Europe and the economy.”

The 10-year yield was little changed at 2.88 percent at 5:31 p.m. in New York, according to Bloomberg Bond Trader prices, after increasing earlier as much as eight basis points to 2.96 percent. The yield dropped to 2.81 percent yesterday, the lowest since Dec. 1. The price of the 3.125 percent security due in May 2021 declined 1/32, or 31 cents per $1,000 face amount, to 102 2/32.

Thirty-year bond yields traded at 4.17 percent before the U.S. sells $13 billion of the debt tomorrow.

Rates on Treasury three- and one-month bills fell below zero for the first time since July 7. Both dropped to negative 0.0051 percent. An offering of $5 billion in 14-day Treasury cash management bills drew a yield of zero, the lowest level since Dec. 30, 2009.

Moody’s Review

Moody’s Investors Service put the U.S. Aaa bond rating on review for possible downgrade, citing the “rising possibility” the debt limit won’t be raised on a timely basis.

“It will put a lot of pressure on the long-end going into the 30-year auction tomorrow,” said Anthony Cronin, a Treasury trader at the primary dealer Societe Generale SA in New York. “If the credit rating is deteriorating, even if it’s temporary, it puts a reminder in the market that our situation is not that different from Greece, Italy or Portugal. Buying 30-year paper at 4.2 percent may not be the best investment.”

U.S. stocks trimmed an advance amid concern lawmakers won’t increase the debt limit, causing a default by the world’s biggest economy. The Standard & Poor’s 500 Index was up 0.3 percent after earlier climbing 1.4 percent on Bernanke’s comments.

Boehner on Default

House Speaker John Boehner said no one wants to see the nation go into government default as the White House and lawmakers work to find a deal to avoid that, Associated Press reported.

“Nobody wants to go there, because nobody knows what’s going to happen,” the news service quoted Boehner as saying.

At today’s auction, indirect bidders, an investor class that includes foreign central banks, bought 42 percent of the notes, compared with 50.6 percent at the June sale. The average for the past 10 auctions is 51.5 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 13.9 percent, the most since May 2010, compared with 8.3 percent at last month’s sale and the 10-auction average of 7.6 percent.

“Rates backed up, which was supportive of the auction,” said Scott Sherman, an interest-rate strategist at the primary dealer Credit Suisse Group AG in New York. “In this environment, people want to be long Treasuries given the events that are going on overseas.” A long position is a bet a security will rise.

Fitch Downgrades Greece

Fitch downgraded Greece to CCC from B. The company cited in a statement the lack of a credible support program for the debt- laden nation, uncertainties on the role of private investors in funding and the growth outlook.

The U.S. auctioned $32 billion of three-year notes yesterday at a yield of 0.670 percent, compared with 0.680 percent in a Bloomberg News survey of 10 primary dealers. The offering was the first note sale since the Fed’s $600 billion of Treasury purchases ended on June 30.

Bernanke told a congressional committee the central bank must “keep all options on the table” to stimulate the economy if necessary.

Bernanke Options

One option, the Fed chief said in testimony to the House Financial Services Committee in Washington, would be a third round of government bond purchases. Another would be to pledge to hold rates at record lows and the Fed’s balance sheet at a record high of almost $3 trillion for a longer period of time. The Fed also could reduce the interest rate it pays banks on excess reserves parked at the central bank.

The comments were Bernanke’s first since a report on July 8 showed the economy added 18,000 jobs in June, fewer than the most pessimistic forecast in a Bloomberg News survey. The Fed’s second round of quantitative easing, $600 billion of Treasury purchases, ended on schedule June 30.

Bill Gross, who runs the world’s biggest debt fund at Pacific Investment Management Co., increased holdings of Treasuries and bonds outside the U.S. last month, while cutting money-market securities.

Gross boosted his $243 billion Total Return Fund’s investment in U.S. government debt to 8 percent of assets in June from 5 percent in May, according to Newport Beach, California-based Pimco’s website. Bonds from non-U.S. developed markets rose to 13 percent of Pimco’s holdings from 10 percent. Cash and equivalents dropped to 29 percent from 35 percent.

‘Fiscal Reckoning’

Dallas Fed President Richard Fisher said central bank efforts to boost the economy have reached their limits and the U.S. faces a “fiscal reckoning” that only lawmakers can resolve.

“The Federal Reserve has already pressed the limits of monetary policy,” Fisher said today in remarks to the Dallas Rotary Club. Adding more liquidity “is not the answer,” and Congress needs to “develop an entirely new structure of incentives for private businesses and investors,” he said.

--Editors: Greg Storey, Dave Liedtka

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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