Bloomberg News

Treasuries Fall as Debate Curbs Auction Demand, Bill Rates Climb

July 27, 2011

July 27 (Bloomberg) -- Treasury notes fell, pushing 10-year yields up from almost a one-week low, as concern lawmakers won’t agree to raise the nation’s debt limit in time to avoid a default damped demand at a $35 billion sale of five-year notes.

Rates on Treasury bills set to mature just after the Aug. 2 debt-ceiling deadline rose to the highest level in five months. The notes sold today, which will be issued a day before the debt cap is reached, drew a yield of 1.580 percent, compared with the average forecast of 1.547 percent in a Bloomberg News survey of nine of the Federal Reserve’s primary dealers.

“The market is saying, ‘we need a deal here,’” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “The market doesn’t know how to price this risk. Default is starting to seep into the marketplace.”

Benchmark 10-year note yields rose three basis points, or 0.03 percentage point, to 2.98 percent at 5:03 p.m. in New York, according to Bloomberg Bond Trader prices. They touched 2.94 percent earlier, the lowest level since July 21, before rising to as high as 3.01 percent. The 3.125 percent note due in May 2021 fell 7/32, or $2.19 per $1,000 face amount, to 101 7/32.

Yields on the current five-year note gained four basis points to 1.52 percent. Two-year note yields climbed six basis points to 0.44 percent and touched 0.45 percent, the highest level since July 8.

Thirty-year yields were little changed at 4.29 percent after erasing gains as the Standard & Poor’s 500 Index fell as much as 2.1 percent in the biggest intraday drop since June 1. The bond yields increased earlier to 4.32 percent.

Bill Rates

Rates on Treasury six-month bills due Aug. 4 touched 0.16 percent, the highest level since February, according to Bloomberg Bond Trader data. The bills are the first government debt securities to mature after the debt-cap deadline.

At today’s five-year note sale, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.62, compared with 2.59 at the June offering and an average of 2.81 at the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 36.6 percent of the notes, versus an average of 40.3 percent at the past 10 sales. They bought 37.6 percent at the June auction.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, bought 14.6 percent of the notes, compared with the 10-auction average of 10.1 percent.

The notes will be issued Aug. 1. They mature in July 2016.

Two-Year Auction

Treasuries gained yesterday as speculation lawmakers would reach a debt accord boosted demand at the government’s $35 billion offering of two-year notes. The debt drew a yield of 0.417 percent, and the bid-to-cover ratio was 3.14, versus 3.08 at the June auction. The U.S. will sell $29 billion of seven- year debt tomorrow.

House Speaker John Boehner worked to salvage his plan to raise the nation’s $14.3 trillion debt ceiling and reduce spending by $3 trillion, which the White House said President Barack Obama will veto. Senate Majority Leader Harry Reid said his competing proposal offers the only “true compromise.”

The non-partisan Congressional Budget Office said both measures fall short of their savings goals, prompting leaders to rework their proposals. Reid’s would cut $2.2 trillion over 10 years, shy of its $2.7 trillion target, while Boehner’s plan would save $850 billion rather than $3 trillion, the CBO said.

‘Choppy Market’

“The focus is squarely on what’s going on in Washington,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc. As one of the 20 primary dealers, the firm is obliged to bid in Treasury sales. “It’s going to be a choppy market, especially with supply this week.”

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

The risk of a credit downgrade is 50 percent even if lawmakers reach an agreement to lift the debt cap before the deadline, Pacific Investment Management Co.’s Mohamed A. El- Erian said. El-Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond funds, spoke in a radio interview on “Bloomberg Surveillance” with Tom Keene. Pimco expects the debt ceiling to be lifted, he said.

“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.”

Beige Book

Treasuries remained lower even after the Fed said the economy grew at a slower pace in more parts of the country since the beginning of June as shoppers restrained spending and factory production eased. The central bank’s Beige Book survey, released today in Washington, showed growth slowed in eight of the 12 Fed regions, compared with four in the last survey.

U.S. government debt erased losses earlier amid speculation it will still attract investors even if the nation’s credit rating is downgraded.

“There’s a lot of cash out there looking for a home,” said Sergey Bondarchuk, an interest-rate strategist in New York at the primary dealer BNP Paribas SA. “Even if Treasuries were downgraded, there’s not a lot out there in terms of alternatives.”

--With assistance from Daniel Kruger in New York. Editors: Greg Storey, Paul Cox

To contact the reporter on this story: Susanne Walker in New York at

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

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