Bloomberg News

Treasury Seven-Year Notes Drop; Auction Draws Record Low Yield

September 29, 2011

Sept. 29 (Bloomberg) -- Treasury seven-year notes dropped after the government’s $29 billion auction as the securities produced a record low yield that was higher than forecast.

The notes 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 average forecast in a Bloomberg News survey of nine of the Federal Reserve’s primary dealers was 1.489 percent. The securities are the first issue likely to benefit directly from the Federal Reserve program of debt buying known as Operation Twist, according to Wrightson ICAP.

“Some of the flight to quality is coming out of the market as better sentiment toward risk assets has entered the market,” said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley, before the auction. “Investors still need yield.” As one of 20 primary dealers, the firm is obligated to participate in U.S. debt offerings.

Yields on current seven-year note gained one basis point, 0.01 percentage point, to 1.47 percent at 1:05 p.m. in New York, according to Bloomberg Bond Trader Prices. Yields on benchmark 10-year notes were little changed at 1.99 percent.

At today’s auction, 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

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.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 13.6 percent, compared with the 10-auction average of 8.2 percent.

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 under what is known as Operation Twist. The Fed is scheduled to publish a schedule of purchases tomorrow.

“The Fed is scheduled to buy Treasuries in the 6- to 8- 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, said Wrightson, a unit of ICAP Plc specializing in U.S. government finance, in a research note.

Note Offerings

Today’s offering is the third of three auctions of U.S. notes this week totaling $99 billion. Yesterday’s $35 billion auction of five-year notes drew a record low yield. The auction of the same amount of two-year notes on Sept. 27 produced the highest demand in a year.

Treasuries have rallied on concern Europe’s debt crisis and a stalled U.S. economy will undermine the global recovery. U.S. debt securities have returned 5.8 percent in the third quarter, the most since the depths of the financial crisis in the fourth quarter of 2008, according to Bank of America Merrill Lynch indexes. They have gained 1.1 percent in September.

New Zealand had its long-term foreign-currency issuer default rating cut to “AA” from “AA+” by Fitch Ratings, which 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.

Thirty-Year Bonds

Yields on 30-year bonds have increased 17 basis points this week after dropping 41 basis points last week after the Fed’s announcement, the most in almost three years.

“There is scope for yields to go lower again,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “We will have the Fed buying at the ultra-long end of the curve, which should support longer-dated bonds.”

Treasury notes dropped 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. 10-year yields will increase to 2.24 percent by the end of the year, according to the average forecast in a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

--Editors: Dennis Fitzgerald

To contact the reporters on this story: Cordell Eddings in New York at; Susanne Walker in New York at

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

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