Bloomberg News

Treasury 30-Year Bonds Gain as Auction Draws Record Low Yield

September 14, 2011

Sept. 14 (Bloomberg) -- The Treasury sold $13 billion of 30-year securities at a record low yield as investors bet the Federal Reserve will buy more bonds.

The longest-term U.S. debt advanced for the first time in three days as the auction produced the highest demand since March. Ten-year notes dropped as France’s President Nicolas Sarkozy and German Chancellor Angela Merkel said they are convinced Greece will remain in the euro zone.

“Everyone is expecting the Fed to take action by purchasing assets out the curve, which is driving buying in the long end,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.

Yields on 30-year bonds dropped six basis points, or 0.06 percentage point, to 3.27 percent at 5:01 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 increased 1 1/8, or $11.25 per $1,000 face amount, to 109 3/32.

Benchmark 10-year note yields dropped one basis point to 1.98 percent after falling two days ago to a record 1.8770 percent. Two-year note yields decreased two basis points to 0.19 percent.

The difference in yield between 30-year bonds and two-year notes fell to 3.09 percentage points after dropping on Sept. 12 to 3.05 percentage points, the narrowest on a closing basis since August 2010.

Bond Auction Yield

At today’s auction, the bonds drew a yield of 3.310 percent, below the previous record of 3.540 percent at the February 2009 offering. The average forecast in a Bloomberg News survey of eight of the Fed’s 20 primary dealers was for a yield of 3.348 percent.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.85, the highest since a reading of 3.02 in March.

Indirect bidders, an investor class that includes foreign central banks, purchased 39.4 percent of the bonds, compared with 12.2 percent at the August auction, the lowest level since February 2008.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 17.3 percent of the notes at the sale, compared with an average of 11.6 percent for the past 10 auctions.

“It was a great auction,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., which as a primary dealer is obliged to participate in government debt offerings. “People are anticipating Operation Twist.”

FOMC Outlook

At its next meeting on Sept. 20-21, the Federal Open Market Committee may decide to swap its holdings of shorter-term Treasuries with longer maturities under what is known as Operation Twist to cut borrowing costs and boost the economy.

The Fed may also lower its interest payments on excess reserves deposited by banks, which may encourage demand for shorter maturities such as two-year notes.

“We now see a greater than 50 percent chance of a cut in interest on excess reserves at next week’s FOMC meeting,” Zach Pandl, senior economist at Goldman Sachs Group Inc. in New York, said today in a research note to clients. “We believe the committee would cut to 10 basis points instead of zero.”

Bonds tumbled on Aug. 11 as speculation Fed policies will stoke inflation sapped demand at the $16 billion 30-year offering. The yield gained as much as 29 basis points, the most on an intraday basis since November 2008.

Weekly Offerings

Today’s auction is the last of three note and bond offerings this week totaling $66 billion. The Treasury sold $21 billion in 10-year debt yesterday at a record low yield of 2 percent and $32 billion of three-year notes on Sept. 12 at an all-time low yield of 0.334 percent.

Treasury 10-year notes dropped and the Standard & Poor’s 500 Index rallied 2.3 percent after Sarkozy and Merkel said after speaking to Greek Prime Minister George Papandreou by phone that Greece’s budget cuts will restore stability to markets amid international calls for European leaders to step up efforts to contain the debt crisis.

Italian Prime Minister Silvio Berlusconi’s government won a confidence vote in the Chamber of Deputies on its 54 billion euro ($74 billion) austerity package, paving the way for final approval of the legislation.

Facing calls to widen support for indebted European countries, China’s Premier Wen Jiabao indicated at the World Economic Forum in Dalian, China, that developed nations should cut deficits and open markets rather than rely on the Asian nation to bail out the world economy.

Treasuries pared their drop earlier today after the Commerce Department reported that U.S. retail sales were flat in August after a revised increase of 0.3 percent in the prior month. The median forecast of 83 economists in a Bloomberg News survey was for 0.2 percent gain.

“Retail sales are weaker than anticipated, but there wasn’t a huge amount of hope for the numbers,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.

--Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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


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