Bloomberg News

Treasuries Drop as Optimism on Europe Damps Demand at Note Sale

October 12, 2011

Oct. 12 (Bloomberg) -- Treasury 10-year note yields rose to the highest level in six weeks as optimism European leaders will be able to contain the region’s debt crisis reduced the haven appeal of the securities at today’s $21 billion auction.

U.S. government bonds are off to the worst monthly start this year after completing the strongest quarter since 2008 amid rising appetite for higher-risk assets. The bid-to-cover ratio on today’s auction, which gauges demand by comparing total bids with the amount of securities offered, was 2.86, the lowest since November 2010. The European Union outlined plans to recapitalize banks and halt the debt crisis, and stocks climbed.

“The lack of demand underscored that there is momentum behind the selloff in Treasuries and the move to riskier assets,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed-income assets. “The hopeful resolution of European credit woes is allowing some of the safety bid to come out of the market.”

Benchmark 10-year yields rose six basis points, or 0.06 percentage point, to 2.21 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 2.27 percent, the highest level since Sept. 1, after falling on Sept. 23 to a record low 1.6714 percent. The price of the 2.125 percent securities due in August 2021 dropped 17/32, or $5.31 per $1,000 face amount, to 99 1/4.

Yields on 30-year bonds increased 10 basis points to 3.20 percent and touched 3.25 percent, the highest since Sept. 20, as the securities dropped for a sixth day in the longest losing streak since May 2007.

Third-Quarter Gain

Treasuries have lost 0.97 percent this month after returning 6.46 percent from June through September, the most since the final quarter of 2008 during the financial crisis, according to a Bank of America Merrill Lynch index.

Thirty-year yields have advanced 25 basis points since Oct. 6, the day before a Labor Department report showed U.S. payrolls added 103,000 jobs in September, more than economists predicted. Analysts project a 0.7 percent gain in retail sales for September, a Bloomberg News survey showed before the government reports the data on Oct. 14.

Today’s auction drew a 2.271 percent yield, the highest since July, compared with the average forecast of 2.231 percent in a Bloomberg News survey of eight of the Federal Reserve’s 22 primary dealers. The previous offering of 10-year notes, on Sept. 13, drew a record low yield of 2 percent.

Indirect bidders, an investor class that includes foreign central banks, purchased 35 percent of the notes at today’s auction, the lowest level since February 2010. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 6.4 percent, compared with an average of 10.6 percent at the past 10 auctions.

30-Year Auction

The Treasury sold $32 billion of three-year securities yesterday and will sell $13 billion of 30-year bonds tomorrow. The entire amount raised this week is new cash, with none of the proceeds dedicated to redeeming maturing securities, according to the Treasury Department.

“The 30-year is always the wild card,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “There’s a lot of confidence brewing out of a potential deal in Europe. There’s also the realization by the market that the U.S. is not going into a double-dip recession, which a week ago was a very big concern.”

European Commission President Jose Barroso called for a reinforcement of banks hit by the euro region’s sovereign debt crisis and a faster start for a permanent rescue fund.

‘Coordinated Approach’

Speaking to the European Parliament in Brussels, Barroso also called for the payout of a sixth loan to Greece. He urged a “coordinated approach” to deliver a “significantly higher capital ratio of highest quality capital” for banks, while offering government funds only as a last resort.

The Standard & Poor’s 500 Index rose 1 percent.

Treasuries remained lower as minutes released by the Fed showed some officials last month wanted to keep further asset purchases as an option to boost the economy. The Fed previously bought $2.35 trillion of assets in two rounds of quantitative easing to spur the economy.

Minutes of the Federal Open Market Committee’s Sept. 20-21 meeting showed debate among policy makers culminated in the decision to replace $400 billion of Treasuries in the central bank’s portfolio with longer-term debt to cut borrowing costs and support the economy.

Chairman Ben S. Bernanke said last week the program, called Operation Twist after a similar effort in the 1960s, is a “significant step but not a game changer” for reviving economic growth and reducing unemployment stuck near 9 percent.

‘Tone of Contention’

“The tone of contention among Fed members is going to continue no matter what happens in the economy going forward,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., a primary dealer.

The central bank is scheduled to buy $4.3 billion to $5 billion of Treasuries tomorrow due between October 2017 and August 2019 under Operation Twist, according to its website. It sold $8.87 billion today of securities due in two years or less.

Philadelphia Fed President Charles Plosser said the operation won’t have a “major impact” on the speed of the economic recovery and that he expects U.S. growth to “gradually accelerate” to about 3 percent next year.

“Although the downside risks around this forecast are apparent, I do not believe we are on the verge of a double-dip recession,” Plosser said in remarks in Philadelphia today.

--Editors: Greg Storey, Paul Cox

To contact the reporters on this story: Cordell Eddings in New York at ceddings@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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