Bloomberg News

Treasury 30-Year Bonds Rise Before Fed Debt-Buying Announcement

September 29, 2011

Sept. 29 (Bloomberg) -- Treasury 30-year bonds advanced for the first time in five days as the Federal Reserve prepared to announce its schedule of purchases of longer-maturing debt under Operation Twist.

U.S. seven-year securities dropped after the government’s $29 billion auction drew a record low yield. Treasuries were headed for their biggest quarterly rally since the depths of the financial crisis in 2008 on concern Europe’s sovereign-debt crisis and a sluggish U.S. economy will undermine the global recovery.

“There’s some set-up for when the Fed comes in, and there may be some anticipation with the announcement due tomorrow,” said Anthony Cronin, a trader in New York at Societe Generale, which as one of the 20 primary dealers is obligated to participate in auctions. “It may have a little psychological impact.”

Yields on 30-year bonds dropped two basis points, or 0.02 percentage point, to 3.05 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 increased 11/32, or $3.44 per $1,000 face amount, to 113 18/32.

The long-bond yields have increased 15 basis points this week after dropping 41 basis points last week following the Fed’s announcement of Operation Twist in the biggest five-day decrease in almost three years.

Treasuries have returned 5.9 percent this quarter, the most since the last three months of 2008, according to Bank of America Merrill Lynch indexes. Thirty-year bonds have returned 27 percent since June 30.

Seven-Year Auction

At today’s seven-year debt offering, the securities drew a yield of 1.496 percent, which was lower than the previous record of 1.580 percent set at the Aug. 25 offering. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.02, compared with an average of 2.79 for the previous 10 sales.

Indirect bidders, a class of investors that includes foreign central banks, bought 41.6 percent of the notes, compared with 51.7 percent last month and the 10-sale average of 46.8 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 13.6 percent, compared with the average of 8.2 percent.

At yesterday’s $35 billion five-year sale, the notes drew a record low auction yield of 1.015 percent. A $35 billion sale of two-year notes on Sept. 27 drew the highest demand in a year.

Seven-Year Notes

Seven-year note yields increased two basis points to 1.47 percent after advancing five basis points before the auction. Benchmark 10-year note yields gained one basis point to 1.99 percent after earlier rising five basis points. Yields on 10- year notes fell last week to 1.6714 percent, the lowest in Fed data beginning in 1953.

“The concessions that developed ahead of the auction were helpful,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “The auction was decent.”

The central bank announced on Sept. 21 that it would buy $400 billion of U.S. debt with maturities of six to 30 years through June while selling an equal amount of securities maturing in three years or less to support growth. The Fed is scheduled to publish a schedule of purchases tomorrow.

Seven-year securities are the first issue likely to benefit directly from Fed debt buying, Wrightson ICAP analysts said today in a research note.

October Schedule

“The Fed is scheduled to buy Treasuries in the six- to eight-year range three times a month, which means that the October schedule that will be published tomorrow should include a coupon pass for which this issue would be eligible by the second week of October at the latest,” according to Wrightson, a unit of ICAP Plc that specializes in U.S. government finance.

Treasury notes dropped earlier today after the Commerce Department reported that the U.S. economy grew at a 1.3 percent pace in the second quarter, faster than estimated last month. The revised increase in gross domestic product compares with a 1 percent gain previously calculated by the government.

German lawmakers approved an expansion of the euro-area rescue fund, clearing the way for European officials to focus on what next steps may be needed to stem the debt crisis.

U.S. notes pared their decline just before the auction after Fitch Ratings cut New Zealand’s long-term foreign-currency issuer default rating to AA from AA+. Fitch cited a high level of debt and unfavorable economic growth. The long-term local- currency rating was cut to AA+ from AAA. The outlook on both ratings is stable.

Ten-year yields will increase to 2.24 percent by year-end, according to the average forecast in a Bloomberg News survey of banks and securities firms, with the most recent forecasts given the heaviest weightings. On Aug. 12, yields were projected to end 2011 at 2.72 percent.

--With assistance from Emma Charlton in London. 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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