Bloomberg News

Treasury Bond Auction Demand Rises as Investors Downplay Moody’s

July 14, 2011

July 14 (Bloomberg) -- The Treasury attracted higher-than average-demand for a third consecutive sale at today’s auction of 30-year bonds as investors downplayed Moody’s Investors Service’s warning that the nation’s rating may be downgraded.

The bid-to-cover ratio on the $13 billion in bonds, which gauges demand by comparing total bids with the amount offered, was 2.80, versus a 2.64 average at the past 10 sales. The auction followed three- and 10-year note sales that were the first since the Federal Reserve ended its bond purchases under quantitative easing on June 30.

“The market seems to believe that the debt-limit situation will be resolved satisfactorily,” said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City who advises community banks on investments of more than $30 billion. “Most market participants see it unthinkable that the president and the Congress would allow a default, even a partial default on U.S. obligations.”

The bonds were sold at a high yield of 4.198 percent, lower than the 4.209 percent forecast in a Bloomberg News survey of 10 of the Fed’s 20 primary dealers before the auction.

The 30-year security fell on concern any agreement on the debt ceiling may not address long-term budget deficits. The yield rose eight basis points, or 0.08 percentage point, to 4.25 percent at 5:01 p.m. in New York, according to Bloomberg Bond Trader prices.

‘Great Auction’

“It’s a great auction,” said Jim Vogel, head of agency- debt research at FTN Financial in Memphis, Tennessee. “The market is saying that regardless of what happens, there is money to be put to work in all the ultra high-grade sovereigns.”

The bid-to cover ratio at the sale of $32 billion in three- year notes on July 12 was 3.22, versus an average of 3.14 at the previous 10 offerings. The ratio at the $21 billion sale of 10 - year notes yesterday was 3.17, versus a 3.11 average at the past 10 auctions.

Treasuries still were headed for a weekly increase as investors sought safety amid speculation Europe’s sovereign-debt crisis will worsen. Greece had its long-term foreign and local currency issuer default ratings cut to CCC from B+ yesterday by Fitch Ratings, which cited the lack of a credible support program for the debt-laden country. The 30-year yield was poised to fall three basis points on the week.

Rates on one- and three-year Treasury bills reached below zero for a second day.

Moody’s Review

Moody’s put the U.S. Aaa credit rating on review for a downgrade for the first time since 1996 yesterday on concern officials won’t raise the nation’s $14.3 trillion debt limit in time to prevent a missed payment. The rating would probably be reduced to the Aa range, Moody’s said in a statement yesterday.

Investors expect U.S. leaders will reach a deal on raising the ceiling by Aug. 2, according to a survey by Citigroup Inc.’s Citigroup Global Markets unit. More than 85 percent of respondents said they expect an agreement, the firm’s July survey showed. It didn’t disclose the number of respondents.

President Barack Obama may summon congressional leaders to a Camp David summit this weekend after the latest round of White House negotiations on the budget deficit and debt limit ended on a tense note. The president walked out of yesterday’s White House meeting with legislative leaders on the deficit, House Majority Leader Eric Cantor told reporters.

The Treasury has said it has until Aug. 2 before its ability to pay the debt expires.

Fed Chairman Ben S. Bernanke told the Senate Banking Committee today a loss of investor confidence could complicate the rollover of the U.S. government’s debt.

‘Loss of Confidence’

“It is entirely possible that loss of confidence or political risk could raise interest rates and make it more difficult or expensive to roll over the debt,” Bernanke said in comments to the Senate Banking Committee.

Bernanke said he’s not prepared to take immediate action to stimulate the economy. He said inflation now is “higher” and “closer” to the central bank’s informal target than was the case in August 2010, and that’s one reason why the Fed won’t immediately embark on a third round of bond purchases. Its second round of quantitative easing, $600 billion of Treasury acquisitions, ended on scheduled June 30.

The central bank must “keep all options on the table” to stimulate the economy if necessary, Bernanke told the House Financial Services Committee yesterday.

U.S. one-month bill rates reached negative 0.0101 percent today before trading at 0.0051 percent. Three-month rates fell to negative 0.0051 percent before trading at 0.0051 percent.

‘Bill Supply First’

“The concern with the debt ceiling is that if the Treasury needs to cut back issuance, they would cut bill supply first,” said Christopher Bury, co-head of fixed-income rates at Jefferies & Co., a primary dealer. “The bigger story in the front end is the money fund community is starved for yield and there’s been essentially more demand than supply.”

The gap between yields on 10-year notes and comparable Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, decreased to 2.26 percentage points today, the narrowest on a closing basis since June 27.

The five-year, five-year forward break-even rate, which the Fed uses to help determine interest-rate targets, reached 2.98 percent on July 11, the lowest since June 27. The gauge fell to 2.18 percent on Aug. 24, 2010, below the 2.79 percent average for the past five years. It touched 3.28 percent in December, the highest level since February 2010.

--With assistance from Joe Ragazzo in New York. Editors: Greg Storey, Dave Liedtka

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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


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