Bloomberg News

Treasury Yields Touch Record Lows Before Three-Year Note Auction

September 12, 2011

Sept. 12 (Bloomberg) -- Treasury 10-year yields fluctuated after reaching a record low as concern Greece is moving closer to default sustained the refuge appeal of government debt before the U.S. sells $66 billion of notes and bonds this week.

Yields on three-year notes rose for the first time in three days as dealers prepared to bid on the $32 billion of the securities to be auctioned at 1 p.m. Lars Feld, an economic adviser to Germany’s Chancellor Angela Merkel, said today decisions taken in July by European leaders “won’t suffice” to save Greece from missing a payment on its debt.

“There’s this ever-present flight-to-quality bid out there,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “We’ve moved powerfully.”

Yields on 10-year notes dropped less than one basis point, or 0.01 percentage point, to 1.92 percent at 12:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 gained less than 1/32, or 31 cents per $1,000 face amount, to 101 27/32. The yields earlier touched 1.8770 percent, the lowest level in Federal Reserve data beginning in 1953.

The 30-year bond yield fell one basis point to 3.24 percent. The yield on the current three-year note gained three basis points to 0.32 percent before today’s auction.

Treasuries rose last week as German officials said Sept. 9 that the government is discussing how to strengthen the nation’s banks in case Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment.

Greek Debt

A haircut in the order of 50 percent will be necessary on Greek debt, and it’s better to go ahead “rather now than later,” Feld said today in an interview with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

Merkel and European Commission President Jose Barroso agreed on the “paramount” importance of the euro, the German government said after the two met in Berlin today.

Treasuries have underperformed bunds, with the extra yield investors get to hold 10-year U.S. notes instead of their German counterparts increasing to 19 basis points, the widest spread since Aug. 5.

The seven-day relative strength index for the 10-year note yield was below 30 for a second day. A reading less than that level indicates a security may be poised for a change in direction. The index was at 30.838 today.

Ried Thunberg ICAP Inc.’s index gauging the outlook for Treasuries through Dec. 31 showed investors are maintaining their bearish views.

Bond Sentiment

The company’s money manager sentiment index was 48 for the seven days ended Sept. 9, versus 47 the week before. A reading less than 50 indicates investors expect yields to rise, according to the New Jersey-based unit of the world’s largest interdealer broker.

The U.S. three-year notes scheduled for sale today yielded 0.325 percent in pre-auction trading. The previous offering of the securities on Aug. 9 drew a yield of 0.5 percent, the least since the start of Bloomberg records in May 1981.

Investors bid for 3.29 times the amount on sale last month. Indirect bidders, which include foreign central banks, bought 47.9 percent, compared with 34.5 percent at the previous auction.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt known as the break- even rate, narrowed for a second day, shrinking one basis point to 1.97 percentage points.

U.S. Inflation

Consumer prices gained 0.2 percent in August, following a 0.5 percent advance in the previous month, economists said before the Labor Department report on Sept. 15.

Returns on inflation-linked bonds fell below those of government debt by the most in almost three years as a world economic slump makes it less likely that easy monetary policies will trigger spiraling consumer prices.

Global sovereign debt gains are 1.3 percentage points higher since the end of July than on so-called linkers according to Bank of America Corp. The difference is the most since November 2008. The gap in yields for these bonds on Sept. 9 indicated investors anticipated an annual global inflation rate of 1.35 percent, down from 1.86 percent four months earlier.

“The inflation-linked debt market is confirming signals from pretty much all other capital markets about concerns over the outlook for European and U.S. economic growth,” Jack Malvey, chief global markets strategist at Bank of New York Mellon Corp., said in an interview on Sept. 8. “The concerns which the market generally shared over the first half of 2011 about the potential resurrection of inflation in so-called advanced economies have subsided.”

--With assistance from Liz Capo McCormick and Daniel Kruger in New York. Editors: Dennis Fitzgerald

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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