Bloomberg News

U.S. Yields at Almost 6-Week Low After Record 5-Year Note Sale

November 23, 2011

Nov. 22 (Bloomberg) -- Treasuries rose amid concern contagion from the European crisis may slow global economic growth, pushing investors to snap up $35 billion in five-year notes at a record low yield.

U.S. 10-year note yields fell to almost the lowest level in six weeks after a report showed the economy in the U.S. expanded less than previously estimated in the third quarter. The five- year notes sold today drew an auction record low yield of 0.937 percent, compared with a forecast of 0.951 percent in a Bloomberg News survey of nine of the Federal Reserve’s primary dealers. Thirty-year bond yields fell as the Fed purchased the securities today as part of a plan known as Operation Twist.

“We are experiencing a significant flight-to-quality bid here, particularly with what’s happening in Europe,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “There’s renewed concern about what’s happening to our economy.”

U.S. benchmark 10-year note yields fell two basis points, or 0.02 percentage point, to 1.93 percent at 3:34 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note due November 2021 rose 6/32, or $1.88 per $1,000 face amount, to 100 16/32. The yield also touched 1.93 percent on Nov. 9, the lowest since Oct. 6.

The yield on the current five-year note was down two basis points to 0.88 percent. Thirty-year bond yields fell four basis points to 2.90 percent.

Fed Buys

The Fed bought $5 billion of notes maturing between 2017 and 2019 today as part of its plan to stimulate the economy, according to the New York Fed’s website. It’s also purchased $2.54 billion of bonds due in 2036 through 2041.

The five-year note sale’s record low auction yield fell below the previous record of 1.015 percent set in September. The Oct. 26 offering drew a yield of 1.055 percent.

The bid-to-cover ratio today, which gauges demand by comparing total bids with the amount of securities offered, was 3.15, the highest since May and compared with an average of 2.83 for the previous 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 45.3 percent of the notes, compared with an average of 42 percent for the past 10 sales.

Bidding Details

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 9.6. percent of the notes, compared with an average of 11.2 percent at the last 10 auctions.

Today’s note offering is the second of three this week totaling $99 billion. The Treasury sold $35 billion in two-year debt yesterday and will sell $29 billion of seven-year securities tomorrow.

“You’ve had Treasury sales plus a whole bunch of Fed sales, and yet we’ve been able to get this out the door without too dramatic a concession,” said Michael Cloherty, head of U.S. interest rate strategist at Royal Bank of Canada’s RBC Capital Markets unit in New York, one of 21 firms that required to bid a Treasuru acutions. “It’s impressive. Europe is certainly helping lower our rates.”

Notes pared losses earlier after a senior lawmaker in German Chancellor Angela Merkel’s coalition said the nation had no alternative plan to solve the region’s sovereign-debt crisis.

Spain’s Debt

Spain’s three-month borrowing costs doubled as it sold bills at an average yield of 5.11 percent, more than twice the rate at the previous auction a month ago. The Spanish Treasury today also sold six-month bills at 5.227 percent, up from 3.302 percent last month.

“There’s more pressure in those peripheral markets,” said Anthony Cronin, a trader at Societe Generale SA in New York, a primary dealer. “People are just keeping an eye on what’s going on in Europe.”

The economy in the U.S. expanded less than previously estimated in the third quarter as the risk of another recession prompted companies to cut inventories for the first time in almost two years.

Gross domestic product climbed at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate, revised Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg News called for no revision.

Credit Rating

Standard & Poor’s and Moody’s Investors Service kept the U.S.’s credit rating unchanged after Congress’s supercommittee failed to reach an agreement on the deficit, setting the stage for $1.2 trillion in automatic spending cuts.

Treasuries were little changed after some Fed policy makers said the central bank should consider easing policy further, according to minutes of their Nov. 1-2 meeting.

“A few members indicated that they believed the economic outlook might warrant additional policy accommodation,” the Fed said in minutes released today in Washington. “However, it was noted that any such accommodation would likely be more effective if it were provided in the context of a future communications initiative, and most of these members agreed that they could support retention of the current policy stance at this meeting.”

Treasuries have returned 9.2 percent this year, the most since 14 percent in 2008 during the financial crisis, according to Bank of America Merrill Lynch data.

--With assistance from Daniel Kruger. Editors: Paul Cox, Greg Storey

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net.

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


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