Bloomberg News

Treasuries Climb as Europe Concern Fuels Demand at Bond Auction

October 13, 2011

Oct. 13 (Bloomberg) -- Treasuries gained, with 30-year bonds ending their longest losing streak in four years, as concern Europe’s debt crisis threatens the global economy spurred demand at the sale of $13 billion of the securities.

The long bonds drew a record low yield of 3.120 percent, compared with a forecast of 3.166 percent in a Bloomberg News survey of eight of the Federal Reserve’s 22 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.94, the most since March, versus an average 2.66 at the past 10 sales. The Fed purchased $4.88 billion of Treasuries in a program to cut borrowing costs.

“It was a very strong auction and gives you indication of which way sentiment is in the broader market, and that is away from risk into safe assets,” said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley, which as a primary dealer is obligated to bid in U.S. debt auctions.

Yields on the current 30-year bond dropped five basis points, or 0.05 percentage point, to 3.15 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. They tumbled earlier as much as 10 basis points. The securities had fallen for six days in the longest set of losses since May 2007. The price of the 3.75 percent bonds due in August 2041 gained 30/32, or $9.38 per $1,000 face amount, to 111 17/32.

The benchmark 10-year note yield fell three basis points to 2.18 percent.

‘Considerable Uncertainty’

Treasuries rose earlier as Credit Suisse Group AG analysts said at least 66 of Europe’s biggest banks would fail a revised European Union stress test. Minutes of the Fed’s September meeting released yesterday showed some policy makers saw “considerable uncertainty” U.S. growth will pick up and wanted to keep bond purchases under quantitative easing as an option.

The banks failing a revised EU stress test would need to raise about 220 billion euros ($302.3 billion) of capital, Credit Suisse analysts led by Carla Antunes-Silva wrote in a note to clients today. Eight banks out of the 90 tested failed the European Banking Authority’s July 15 stress test, with a combined capital shortfall of 2.5 billion euros.

“At some point a tough decision and a concrete plan will have to come out of Europe, or we will stay near these levels in Treasuries,” said Christopher Sullivan, who oversees $1.7 billion as chief investment officer at United Nations Federal Credit Union in New York.

Operation Twist

Fed policy makers at their Sept. 20-21 meeting decided to buy $400 billion of longer-term Treasuries through June and sell an equal amount of shorter-term debt in its portfolio to reduce borrowing costs. The program is called Operation Twist after a similar effort in the 1960s. The Fed previously purchased $2.35 trillion of assets in two rounds of quantitative easing to spur the economy.

The central bank bought $4.88 billion of Treasuries today maturing from October 2017 to August 2019 as part of the program, according to its website.

“The Fed leaving the door open for QE3 sort of set the stage for a bit of a rally, as it brings potential for more buying into the market, which would sterilize Operation Twist,” said Sean Murphy, a trader at the primary dealer Societe Generale SA in New York.

At today’s auction, indirect bidders, an investor class that includes foreign central banks, purchased 28.7 percent of the notes, compared with 39.4 percent at the September sale and the 37.9 percent average for the past 10 auctions.

‘You Do It’

“Most people don’t believe the improvement in risky assets will be long-lived, with Europe still hanging over everyone’s head and as the U.S. fiscal and economic position remains generally weak,” said Morgan Stanley’s Caron. “So when you have a chance to buy cheap bonds in this atmosphere you do it.”

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 29.5 percent of the notes, the highest level since March 2010. That compared with 17.3 percent at the last auction and an average of 12.2 percent at the past 10 offerings.

“There is obviously demand for the long bond from direct bidders,” said Thomas Simons, a government debt economist in New York at the primary dealer Jefferies Group Inc. “You’ve had foreign central banks selling the sector of late, but direct bidders have picked up the slack in the 30-year. The market is coming to the realization that you can’t avoid the fact that the Fed is buying there.”

Last month’s $13 billion sale of 30-year bonds generated a then-record low yield of 3.31 percent.

New Cash

Today’s offering was the last of three note and bond sales this week totaling $66 billion. A $32 billion auction of three- year notes on Oct. 11 drew a yield of 0.544 percent, and a $21 billion sale of 10-year debt yesterday yielded 2.271 percent.

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 U.S. will sell $7 billion in 30-year Treasury Inflation Protected Securities on Oct. 20.

Treasuries have returned 7 percent this year, a Bank of America Merrill Lynch index shows. They have lost 0.7 percent in October after gaining 6.4 percent from July through September, the biggest quarterly increase since 2008.

U.S. retail sales increased 0.7 percent last month after stalling in August, economists in a Bloomberg survey forecast before the Commerce Department reports the data tomorrow.

The gap between yields on U.S. 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed for the first time since Oct. 3. It was 1.94 percentage points, from 1.98 percentage points yesterday.

--Editors: Greg Storey, Dennis Fitzgerald

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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


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