Bloomberg News

Treasuries Fall as Demand Wanes Amid Eased European Debt Concern

November 13, 2011

Nov. 12 (Bloomberg) -- Treasuries fell, with the difference between 10-and 30-year yields widening to the most since September, as signs Europe’s debt crisis may be stabilizing reduced demand at auctions of the securities.

U.S. 30-year bond yields rose from almost the lowest level in a month as Greece and Italy took steps to form new governments and address budget and sovereign-debt problems, damping demand for haven assets. Yields were higher than forecast at 10- and 30-year Treasury auctions this week. Retail sales gained in October at a slower rate than September, according to a Bloomberg News survey before a Nov. 15 report.

“We continue to be transfixed by the events in Europe,” said Chris Ahrens, head rates strategist in Stamford, Connecticut, at UBS AG, one of the 21 primary dealers that are required to bid at Treasury auctions. “Because of the uncertainty and the low yields, people sat on their hands and left the dealer community to underwrite the auctions, which is why we are higher in yield on the week.”

Thirty-year yields rose two basis points, or 0.02 percentage point, to 3.11 percent in New York on Oct. 10, compared with Oct. 4. The bond market was closed yesterday. The 3.75 percent securities maturing in August 2041 fell 10/32, or $3.13 per $1,000 face amount, to 112 14/32.

Yield Difference

U.S. 10-year note yields rose two basis points to 2.06 percent. The so-called yield curve measuring the difference between 10- and 30-year debt reached 107 basis points, the most since Sept. 28.

Treasuries have rallied this year amid sluggish economic growth and haven demand linked to Europe’s debt crisis. U.S. debt has returned 8.6 percent, the most since 14 percent during the financial crisis in 2008, according to Bank of America Merrill Lynch index data.

On Nov. 10, the $16 billion 30-year sale of bonds drew a yield of 3.199 percent, compared with the average forecast of 3.148 percent in a Bloomberg News survey of eight 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 2.40, compared with an average of 2.68 for the past 10 sales.

Bond prices weakened into the sale, producing a 4.7 basis point tail, or the difference between the lowest bid and the average bid in the auction, according to CRT Capital Group LLC. The Fed’s primary dealers purchased 55.7 percent of the bonds, the most since August.

Auction Detail

The $24 billion 10-year note auction on Nov. 9 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 was 2.64, the lowest since December 2009.

“The market has been at lofty levels on the back of the flight-to-quality trade, but levels of demand for long-dated debt wane as the yields get lower as investors just lose interest in getting less return,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse Group AG, a primary dealer. “It’s a warning sign you don’t want to get carried away with buying 10-year notes below 2 percent and 30- year debt as it nears 3 percent.”

The $32 billion offering of three-year notes on Nov. 8 saw stronger demand, attracting the most bidders since at least 1993.

Economic View

The number of Americans filing applications for unemployment benefits during the week ended Nov. 5 fell to the lowest level in seven months, a sign the recovery may be encouraging companies to limit cuts in headcount.

Retail sales gained 0.3 percent in October, according to the median forecast in a Bloomberg News survey of 48 economists. Sales gained 1.1 percent in September, the most since February.

“Slightly better economic news, a little bit better feelings about Europe: it’s no wonder the 30-year auction didn’t go so well,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, which manages $12 billion in bonds. “Markets always swing too much in either direction.”

Italy’s Chamber of Deputies will give final approval to the austerity legislation this weekend and Prime Minister Silvio Berlusconi will resign “a minute later,” Chamber Speaker Gianfranco Fini said. The government may be led by former European Union Competition Commissioner Mario Monti.

Greek Government

In Greece, a unity government led by Lucas Papademos was sworn in yesterday with a mandate to implement budget measures and decisions related to a 130 billion-euro bailout agreed on an Oct. 26. Elections may take place on Feb. 19.

Treasuries held in custody by the Fed for foreign central banks rose the most since September 2010 in the week after Japan intervened to blunt the appreciation of its currency, the yen, by buying dollar in the foreign exchange market.

Custodial holdings rose 1.7 percent to $2.72 trillion for the week ended on March 9 according to the central bank. Japan’s intervention may have amounted to as much as $100 billion of yen sales, some of which may have flowed to the Treasury market, according to a Nov. 3 note by strategists at Bank of America Corp.

Treasury 10-year yields will rise to 2.11 percent by the end of the year, according to the median forecast of 56 economists in a Bloomberg News survey. That represents a one basis point increase from October’s forecast. The yield is projected to rise to 2.72 percent by the end of 2012, compared with a 2.75 percent forecast last month.

--Editors: Paul Cox, Dave Liedtka

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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