Bloomberg News

Treasuries Fall as Auction Produces Record Low Yield

September 13, 2011

(Corrects length of decline in first sentence in an article that originally ran on Sept. 13.)

Sept. 13 (Bloomberg) -- Treasuries fell as the government sold $21 billion in 10-year notes at a record low yield and concern eased that Europe’s debt crisis may cripple the region’s financial institutions.

Bonds fell as German Chancellor Angela Merkel told the Berlin broadcaster Inforadio that she won’t allow Greece to go into “uncontrolled insolvency.” Even with today’s drop in prices, demand at the U.S. auction from a group of investors including foreign central banks was the highest since June.

“It’s not a bad level for the Treasury, that’s for sure,” said Christopher Sullivan, who oversees $1.7 billion as chief investment officer at United Nations Federal Credit Union in New York. “Greece and the euro zone in its entirety will remain a focus of the market, but today we seem to have gotten a reprieve in risk aversion.”

Yields on current 10-year notes advanced four basis points, or 0.04 percentage point, to 1.99 percent at 5:11 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities due in August 2021 dropped 3/8, or $3.75 per $1,000 face amount, to 101 6/32. The yield slid to a record low 1.877 percent yesterday.

The Standard & Poor’s 500 Index increased 0.9 percent. Crude oil for October delivery gained 1.8 percent to $89.81 a barrel. The euro rose from the lowest level against the dollar since February.

U.S. Auction

At today’s U.S. auction of 10-year notes, the securities produced a yield of 2 percent, below the previous record of 2.140 percent at last month’s offering. The average forecast in a Bloomberg News survey of 10 of the Federal Reserve’s 20 primary dealers was 1.998 percent.

Indirect bidders, including foreign central banks, bought 48.5 percent of the notes, the highest share since the June 8 auction. They bought 35.4 percent in August.

“The auction was good,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Demand was there.”

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 11.1 percent of the notes after a record high 31.7 percent in August.

The U.S. sold $32 billion of three-year debt yesterday at a record low yield of 0.334 percent. It will sell $13 billion in 30-year securities tomorrow in the last of this week’s $66 billion in note and bond offerings.

The entire amount raised this week is new cash, with none of the proceeds dedicated to redeeming maturing securities, according to the Treasury Department.

Budget Deficit

The U.S. government’s budget deficit widened in August, primarily reflecting a calendar-related jump in spending compared with the same month last year.

The gap climbed to $134.2 billion, exceeding the August 2010 shortfall of $90.5 billion, according to the Treasury Department’s monthly budget statement issued in Washington. For the fiscal year to date, the deficit rose to $1.23 trillion, less than at the same point in 2010.

Other U.S. government reports this week are forecast to show little or no inflation in August.

Producer prices were unchanged after a 0.2 percent increase in July, according to the median forecast of 76 economists before tomorrow’s Labor Department figures. Consumer prices gained 0.2 percent last month following a 0.5 percent advance in July, a Sept. 15 report is forecast to show.

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, was 1.95 percentage points, almost the lowest since October 2010. The 10-year average is 2.12 percentage points.

Fed Asset Purchases

The Fed said today it will buy about $16 billion over the next month as part of its program of reinvesting the proceeds from maturing assets on its balance sheet. At its next policy meeting Sept. 20-21, the central bank may decide to swap its holdings of short-term Treasuries with long-term securities in a bid to cut borrowing costs.

Treasuries fell today as Merkel said in a radio interview with Inforadio that Greece is taking the right steps to get its next bailout payment, warning against allowing a Greek default because of the risk of contagion for other euro-area countries.

Greek Prime Minister George Papandreou planned to hold a conference call with Merkel and French President Nicolas Sarkozy tomorrow on developments in Greece and the euro area.

Schaeuble’s View

German Finance Minister Wolfgang Schaeuble said he doesn’t foresee a euro-area “economic government” in the immediate future and rejected a “European superstate,” Rheinische Zeitung reported citing an interview.

Italy sold 3.9 billion euros ($5.3 billion) of notes due in September 2016 at an average yield of 5.60 percent, up from 4.93 percent at the previous auction in July.

Treasury note investors were less optimistic this week, according to a JPMorgan Chase & Co. weekly poll of clients. The net percentage of investors holding U.S. notes decreased to minus 6 percent this week from minus 4 percent the previous week. The net figure is the difference between the percentage of investors long on Treasury notes, expecting prices to increase, and the percentage of those short.

--Editors: Dennis Fitzgerald

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

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


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