Bloomberg News

Treasuries Gain as U.S. Sells 10-Year Notes, Safety Assets Rally

November 09, 2011

Nov. 9 (Bloomberg) -- Treasuries rose, pushing 10-year note yields down the most in a week, as investors sought safe assets amid concern Italy will struggle to form a government and implement austerity measures.

The Treasury sold $24 billion of 10-year debt at the second-lowest yield in the history of the auctions. Italian debt securities slumped, driving five- and 10-year yields to more than 7 percent for the first time since the euro was introduced in 1999, even as the European Central Bank was said to be buying the nation’s debt.

“The focus is going to be on Europe until a solution comes out of Europe,” said Shyam Rajan, an interest-rate strategist at Bank of America Corp. in New York, of the Federal Reserve’s 21 primary dealers that are required to bid a Treasury auctions. “Given the kind of headlines you’ve had, people want to be in Treasuries.”

Benchmark 10-year yields dropped 12 basis points, or 0.12 percentage point, to 1.96 percent at 5:15 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 1.927 percent, the lowest level since Oct. 6. The 2.125 percent securities rose 1 1/32 or $10.31 per $1,000 face amount to 101 14/32.

Thirty-year bond yields fell 11 basis points to 3.03 percent.

Auction Results

The 10-year auction drew a yield of 2.030 percent, compared with the average forecast of 2.006 percent in a Bloomberg News survey of nine of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.64, the lowest since December 2009.

The below-average bidding at the sale was more a reflection of the strength of the market’s move, which held yields low for a longer-than-usual period before the auction, than a lack of demand to own Treasuries, said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, a primary dealer.

“The volatility in the market is making it a little harder to take down the supply,” Lederer said. “Europe is going to be the driver of the markets for the foreseeable future.”

Indirect bidders, an investor class that includes foreign central banks, purchased 41.6 percent of the notes at today’s auction, compared with 35 percent at the October offering and an average of 47.9 percent for the past 10 sales.

Auction Buyers

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.2 percent of the notes, compared with 6.4 percent at last month’s sale and an average of 10.1 percent at the past 10 auctions.

Today’s auction was a net pay-down of $5.4 billion, as more than $29.4 billion of maturing 10-year securities are held by the public and the Fed. That includes $23.9 billion by the public and $5.5 billion by the central bank, according to Treasury data.

The Treasury sold $32 billion of three-year securities yesterday and will sell $16 billion of 30-year bonds tomorrow.

Interest-rate swap spreads, a measure of stress in credit markets, rose to the highest in more than a year. The difference between the two-year swap rate and the comparable-maturity Treasury note yield increased 3.55 basis points to 39.63 basis points, according to data compiled by Bloomberg.

Italian yields rose to euro-era records as LCH Clearnet SA raised the deposit factor charged for Italian bonds due in seven to 10 years. The deposit requirement will be raised to 11.65 percent, the French unit of LCH Clearnet said in a document on its website dated yesterday. That compares with a charge of 6.65 percent announced on Oct. 7.

Bond Trade

Clearing houses guarantee investors’ trades are completed by standing in the middle of two counterparties. They raise margin requirements to protect themselves against losses if one side of the trade fails.

“LCH raised the margin on Italian bonds, and that boosted demand for safety,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. “Treasuries are trading up on that, as they still have safe-haven allure amid the euro-region’s debt crisis.”

U.S. bonds fell and stocks rallied yesterday after Berlusconi offered to quit, stoking speculation the country will appoint a new leader who can implement measures to curb its debt load. Berlusconi’s coalition has been unraveling since contagion from the euro region’s debt crisis led the country’s bond yields to surge, prompting Italy’s European Union allies and the European Central Bank to demand more austerity measures to balance the budget and try to spur growth.

‘Headline Risk’

“You’re focused on headline risk,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Economic fundamentals are tossed out right now. This could get really bad really quick and the market is starting to see that.”

The Fed sold $1.33 billion of Treasury Inflation Protected Securities with maturities from April 2012 to April 2014 today. The sales were part of its program, known as Operation Twist, to replace $400 billion of short-term debt in its portfolio with longer-term securities in an effort to reduce borrowing costs further and counter rising risks of a recession.

U.S. government bonds have returned investors 8.5 percent in 2011, poised for the biggest annual gain since 2008, according to an index compiled by Bank of America Merrill Lynch.

--Editors: Paul Cox, Ken Pringle

To contact the reporter on this story: Daniel Kruger in New York at

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

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