Bloomberg News

Treasury Notes Fall as Risk Aversion Ebbs Before U.S. Auctions

October 24, 2011

Oct. 24 (Bloomberg) -- Treasury notes dropped, led by five- and seven-year securities, as a decline in investor risk aversion reduced the refuge appeal of U.S. government debt before three note auctions this week totaling $99 billion.

Yields rose before the Treasury sells $35 billion of two- year debt, the same amount of five-year notes and $29 billion of seven-year securities in three daily offerings starting tomorrow. Yields on 30-year bonds fluctuated after increasing earlier as the Federal Reserve purchased $2.5 billion of the securities.

“People are setting up for supply,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “We’re still in a range, as we have been for a while now. I don’t think we’ll break out of that range.”

Five-year note yields rose two basis points, or 0.02 percentage point, to 1.08 percent at 2:50 p.m. New York time, according to Bloomberg Bond Trader prices. The yields, which fell earlier to 1.04 percent, have traded between 1 percent and 1.11 percent since Oct. 18. The price of the 1 percent securities due in September 2016 declined 2/32, or 63 cents per $1,000 face amount, to 99 19/32. Seven-year note yields gained two basis points to 1.68 percent, and 10-year yields rose less than one basis point to 2.23 percent.

Thirty-year bond yields were little changed at 3.27 percent after earlier dropping to 3.21 percent.

The Standard & Poor’s 500 Index climbed 1.3 percent as Caterpillar Inc.’s earnings beat estimates. The company is the largest construction and mining-equipment maker.

The dollar fell against all of its 16 most-traded counterparts as investors sought higher-yielding assets.

Refinancing Program

Treasuries pared an earlier advance after the Federal Housing Finance Agency announced changes to guidelines for Fannie Mae’s and Freddie Mac’s refinancing program for so-called underwater borrowers, in a statement posted on its website.

The adjustments include expanding the Home Affordable Refinance Program to cover borrowers with any amount of negative home equity and an end to “certain” contractual promises about underwriting quality made by lenders, called representations and warranties.

“That would be positive for the economy,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The market is reacting a little bit to that.”

Economy Accelerates

The U.S. will report this week the economy grew in the third quarter at the fastest pace in a year, economists in a Bloomberg News survey forecast.

Gross domestic product expanded an annualized 2.5 percent in the third quarter, according to economist estimates before the Oct. 27 report, after growing 1.3 percent in the previous period. The Conference Board’s consumer confidence index climbed in October for a second month, another survey showed before data due tomorrow from the New York-based group.

U.S. government debt is headed for its first monthly drop since June. It has lost 1.1 percent in October, according to Bank of America Merrill Lynch indexes.

The Fed bought $2.502 billion of Treasuries today maturing from February 2036 to May 2041, according to its website. The purchase is part of its plan, dubbed Operation Twist after a similar program in the 1960s, to lower borrowing costs by buying $400 billion in longer-term Treasuries through June and selling an equal amount of shorter-maturity holdings.

Dallas Fed President Richard Fisher said it’s not clear if the tactic is working. He spoke in a speech in Toronto.

Constrained Growth

The Fed may still increase monetary stimulus, including an expansion of its balance sheet, according to Pacific Investment Management Co., which oversees the world’s largest bond fund.

Growth in the U.S. will be constrained next year amid an “unprecedented amount” of fiscal contraction, Scott Mather, Pimco’s head of global portfolio management, said at a briefing today in Sydney. The Fed will start by changing its language before taking steps to bolster the economy including efforts to stabilize the housing market, he said.

Treasuries rose earlier as European leaders struggled to contain their sovereign debt crisis. Leveraging the European Financial Stability Facility rescue fund to more than 1 trillion euros ($1.4 trillion) and how far to cut Greece’s debt load emerged as two main hurdles in the way of a deal to stop the debt crisis at the Oct. 26 European Union summit, the second in four days.

“Until we get some resolution out of Europe and the market decides how it feels about the plan, I see us in a sideways range,” said Guggenheim’s Rogan.

--With assistance from Paul Dobson in London. Editors: Greg Storey, Dave Liedtka

To contact the reporter on this story: 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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