Bloomberg News

Treasuries Decline as Debt-Ceiling Debate Stalls Before Auction

July 27, 2011

July 27 (Bloomberg) -- Treasuries declined as negotiations stalled between the Obama administration and congressional leaders on lifting a limit on U.S. borrowing before next week’s deadline triggers a debt default.

Yields on five-year securities rose before the Treasury sells $35 billion of the debt today in the second of three note auctions this week. Bonds fell as House Speaker John Boehner worked to salvage his plan to raise the debt ceiling and curb spending by $3 trillion, which the White House said President Barack Obama will veto. The struggle may lead to the U.S. losing its top-level credit rating, according to BlackRock Inc. and Loomis Sayles & Co.

“It’s deadlock,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “We have to wait and get some plan out of Washington, and the longer it goes on, the more we are frozen.”

Yields on five-year notes increased four basis points, or 0.04 percentage point, to 1.52 percent at 9:16 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.5 percent security due in June 2016 fell 5/32, or $1.56 per $1,000 face amount, to 99 30/32.

Benchmark 10-year note yields advanced four basis points to 2.99 percent. That compares with a 4.06 percent average over the past decade. Thirty-year bond yields were up three basis points to 4.31 percent.

Durable-Goods Orders

Treasuries fell even after orders for U.S. durable goods unexpectedly dropped in June. Bookings for goods meant to last at least three years fell 2.1 percent after a 1.9 percent gain the prior month that was smaller than last reported, the Commerce Department said today in Washington. The median forecast of 76 economists surveyed by Bloomberg News projected a 0.3 percent increase.

Treasury Secretary Timothy F. Geithner has said the U.S. will run out of options to prevent a default unless the $14.3 trillion borrowing limit is increased before the Aug. 2 deadline. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have said they may consider downgrading the nation’s AAA ranking if officials fail to resolve the stalemate.

“Our guess is, when push comes to shove, the debt ceiling will be raised,” said Bob Doll, chief equity strategist at New York-based BlackRock, which manages $3.66 trillion. “What goes along with that is very difficult to tell, and that’s why the threat of a downgrade still exists,” Doll said in an interview today with Susan Li on Bloomberg Television’s “First Up.”

The U.S. will probably still lose its top rating as politicians are unlikely to agree on a plan to reduce spending, said Kathleen Gaffney, co-manager of the $21 billion Loomis Sayles Bond Fund.

Bank, Company Bonds

U.S. investors are increasingly favoring bank or company bonds over Treasuries. An index of corporate debt with the same AAA rating as the U.S. is outperforming Treasuries by 0.13 percent, the most since March.

Debentures from Wal-Mart Stores Inc., the largest retailer, and Paris-based utility EDF SA, both rated the second-highest AA level, are the best-performing investment-grade corporate securities globally this month through July 25, according to Bank of America Merrill Lynch index data.

The five-year Treasuries being sold today yielded 1.555 percent in pre-auction trading, compared with 1.615 percent at the prior offering on June 28. Investors bid for 2.59 times the amount on sale last month, the least in a year.

“Fives are very rich on the curve,” Ader of CRT said. “They are not really attractive from this standpoint.”

Indirect Bidders

Indirect bidders, the category of investors that includes foreign central banks, bought 37.6 percent of the notes at the last sale, versus the 10-sale average of 40.3 percent.

The Treasury auctioned $35 billion of two-year debt yesterday, and will conclude this week’s offerings with $29 billion of seven-year notes tomorrow. Two-year notes issued yesterday drew a yield of 0.417 percent, the most since May.

The bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, rose to 3.14 from 3.08 at the previous sale of the notes, indicating stronger demand.

“For big investors like the Asian central banks there aren’t too many alternative places for them to put their money, so by default they will have to keep buying Treasuries,” said Piet Lammens, the head of research in Brussels at KBC Bank NV.

--With assistance from Wes Goodman in Singapore. Editors: Greg Storey, Paul Cox

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net

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


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