Bloomberg News

Treasuries Climb Amid Concern on Progress at Europe Debt Talks

October 25, 2011

Oct. 25 (Bloomberg) -- Treasuries rose, pushing 30-year yields down the most in three weeks, as concern about how much progress European leaders are making on their debt crisis sent stocks tumbling and boosted U.S. government debt’s haven appeal.

An auction of $35 billion of U.S. two-year notes drew higher-than-average demand and the most buying by indirect bidders, a category that includes foreign central banks, in a year. The Standard & Poor’s 500 Index fell for the first time in four days as the European Union canceled a finance ministers’ meeting, spurring bets leaders may struggle to resolve the crisis at a summit tomorrow. U.S. consumer confidence slumped.

“The market is very concerned that Europe will not step up to the plate,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, which manages $12 billion. “It’s driving demand across the entire Treasury curve.”

U.S. 30-year bond yields tumbled 14 basis points, or 0.14 percentage point, to 3.13 percent at 5:05 p.m. New York time, according to Bloomberg Bond Trader prices. They fell as much as 15 basis points, the biggest intraday drop since Oct. 3, after earlier touching 3.31 percent, the highest level since Sept. 16. The 3.75 percent securities maturing in August 2041 advanced 2 7/8, or $28.75 per $1,000 face value, to 111 30/32.

Five-year note yields fell 11 basis points to 0.99 percent before the Treasury sells $35 billion of the securities tomorrow. It was the biggest decline on a closing basis since August.

Two-Year Auction

Yields on current two-year notes slid four basis points to 0.24 percent, the lowest level since Oct. 4, after today’s auction of the securities drew a yield of 0.281 percent. That compared with the average forecast of 0.288 percent in a Bloomberg News survey of eight of the Federal Reserve’s 22 primary dealers and a record low auction yield of 0.222 percent at the Aug. 23 sale.

The sale’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.64, versus an average of 3.33 at the past 10 offerings.

“It was a great auction,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., which as a primary dealer is obligated to bid in Treasury sales. “Nothing has changed. You still have uncertainties in Europe and shaky equities.”

Most in a Year

Indirect bidders purchased 39.2 percent of the notes, the most since they bought 40 percent at an auction of the maturities in October 2010. The average for the 10 offerings before today was 30.1 percent.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, bought 8.2 percent of the notes today, compared with 12.2 percent last month and an average of 14.9 percent at the past 10 sales.

Today’s offering was the first of three note auctions this week totaling $99 billion. The Treasury will sell $35 billion in five-year debt tomorrow and $29 billion of seven-year securities on the following day.

More than $61 billion of maturing two-year securities are held by the public and the Fed, according to Treasury data: $57.2 billion by the public and $4 billion by the central bank. This week’s auctions are a net paydown of $48.8 billion.

Two-year notes have returned 1.3 percent this year, compared with a 7.5 percent gain for the broader Treasury market, according to Bank of America Merrill Lynch indexes.

The Fed bought $4.597 billion of Treasuries today due from October 2017 to August 2019, according to its website. The purchase is part of the central bank’s plan, dubbed Operation Twist after a similar program in the 1960s, to lower borrowing costs by buying $400 billion in long-term U.S. debt through June and selling an equal amount of shorter-term holdings.

European Meetings

Treasury 30-year bond yields fell for the first time in six days, dropping from the highest level in more than a month as the finance ministers’ meeting tomorrow was called off. The S&P 500 dropped 2 percent.

Summits of the 27 EU leaders and 17 heads of the euro region will take place as scheduled, EU President Herman Van Rompuy said.

The gatherings will cap six days of haggling among finance ministers, central and commercial bankers, chancellors and prime ministers over the shape of Greece’s second bailout, the recapitalization of banks and the retooling of the 440 billion- euro ($612 billion) rescue fund into a more potent weapon.

The finance chiefs’ meeting was canceled because the bank- recapitalization issue cannot be decided before other elements of the rescue package, a person familiar with the matter said on condition of anonymity.

Confidence Drops

Treasuries extended gains earlier as U.S. consumer confidence unexpectedly slumped in October. The Conference Board’s sentiment index decreased to 39.8 from a revised 46.4 reading in September, figures from the New York-based private research group showed.

This month’s confidence reading was weaker than the most pessimistic forecast in a Bloomberg News survey in which the median projection was 46.

--Editors: Greg Storey, Paul Cox

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@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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