Bloomberg News

U.S. 7-Year Notes Sell at Record Low Yield on Europe Debt Crisis

November 24, 2011

Nov. 23 (Bloomberg) -- Treasuries gained as the U.S. sold $29 billion in seven-year notes at a record low auction yield amid concern of contagion from the European debt crisis, pushing investors into the safety of government debt.

U.S. debt advanced as German government bonds slid after the nation missed its maximum sales target at a bund auction by 35 percent. The difference between yields on Treasury 10-year notes fell below comparable bunds and widened to the most since May 2009, suggesting Germany’s status as a main refuge from Europe’s worsening sovereign-debt crisis is waning. Today’s U.S. auction followed a record-low-auction yield at yesterday’s five- year note sale.

“It was a very good auction, wrapping up a week of good auctions,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “There is very strong demand for Treasuries with what’s going on in Europe and with the supercommittee unable to come to a resolution at home.”

The yield on the current seven-year note fell four basis points, or 0.04 percentage point, to 1.36 percent, at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent notes maturing in October 2018 rose 8/32, or $2.50 per $1,000 face amount, to 102 19/32.

The yield on the benchmark 10-year note fell three basis points to 1.88 percent, the least since Oct. 6. Thirty-year bond yields fell five basis points to 2.83 percent.

Bidding Details

The seven-year notes drew a yield of 1.415 percent, compared with a forecast of 1.446 percent in a Bloomberg News survey of 10 of the Federal Reserve’s primary dealers. The bid- to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.2, the highest since May and compared with an average of 2.8 for the previous 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 39.9 percent of the notes, compared with an average of 43.7 percent for the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased a record 18.9 percent of the notes, compared with an average of 9.4 percent at the last 10 auctions.

The Treasury resumed selling seven-year notes in February 2009 as it sought additional ways to raise money during the depths of the financial crisis, after having discounted the maturity in April 1993.

Debt Returns

U.S. debt maturing in seven to 10-years has returned 14 percent this year, outperforming a 9.3 percent return for the broader Treasury market, according to Bank of America Merrill Lynch indexes, as of yesterday.

Today’s offering is the third of three auctions of U.S. notes this week totaling $99 billion. The two-year note auction on Nov. 21 produced the highest bid-to-cover ratio on record for a fixed-coupon Treasury note or bond, 4.07, while yesterday’s five-year note sale was priced at a record low yield for the securities of 0.937 percent.

“On a scale from one to 10, all of the week’s auctions were a 10,” Guggenheim Partners’ Rogan said. “And it’s because people are just that nervous.”

Germany’s bund auction shows the nation is not immune to investors’ increasing aversion to European debt, Frank Schaeffler, a lawmaker from Chancellor Angela Merkel’s coalition said today in Berlin.

Ten-year bund yields rose 23 basis points to 2.15 percent, climbing above Treasury rates. Investors demanded a 27 basis- point premium to hold the German securities instead of their U.S. counterparts, compared with a 12-month average of 15 basis points in Germany’s favor.

“It doesn’t look like Europe is going to have any type of solution anytime soon, and until they do there will continue to be a major cloud over the growth outlook and will keep interest rates low for a long time,” 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. “Equity prices have been leaking lower, and as a result there is a continued flight-to-quality bid into Treasuries.”

The failure of the U.S. deficit reduction supercommittee on Nov. 21 to reach a deal means several tax programs, including a payroll tax holiday, risk expiring at the beginning of next year, weighing on the household spending that accounts for about 70 percent of the world’s largest economy.

Budget Debates

“As well as the euro-region crisis, we have the U.S. supercommittee that seems to have failed and that means there will be automatic cuts in spending which will weigh on growth, playing into strong demand for Treasuries,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich.

Treasuries weakened earlier after reports showed U.S. durable goods orders at factories fell less than forecast in October and weekly jobless claims remained lower than 400,000.

Bookings for durable goods meant to last at least three years declined 0.7 percent, less than forecast, after a 1.5 percent drop the prior month that was more than twice as large as originally reported, data from the Commerce Department showed today in Washington.

Jobs Picture

Applications for jobless insurance increased 2,000 in the week ended Nov. 19 to 393,000, Labor Department figures showed today in Washington. Economists forecast 390,000 claims, according to the median estimate in a Bloomberg News survey

Gross domestic product climbed at a 2 percent annual rate from July through September, down from a previous estimate of 2.5 percent, the Commerce Department said yesterday.

“Expectations are still for upside into the yearend, given the uncertainties in Europe and the broader economic and policy risks risk facing the U.S.” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Treasuries have been, and could very well continue to be, the outperforming asset class. Yields are going to go lower.”

Treasury trading is scheduled to close worldwide tomorrow for the U.S. Thanksgiving holiday.

--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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