Bloomberg News

Treasuries Drop as Housing, German Confidence Damp Haven Demand

December 20, 2011

Dec. 20 (Bloomberg) -- Treasuries dropped, with yields on 30-year bonds climbing from an 11-week low, as U.S. housing starts topped economists’ estimates and German business confidence unexpectedly grew.

Even with prices falling, the Treasury sold $35 billion of five-year notes at a record low yield of 0.88 percent, underscoring the persistent investor demand for shorter-term U.S. debt as a refuge from Europe’s financial crisis. The U.S. also received record demand for $30 billion of four-week bills auctioned at a rate of zero. Treasuries surged last week the most since early November.

“The market has gotten fatigued,” said Scott Graham, head of government-bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago, one of the 21 primary dealers required to bid in U.S. debt offerings. “We’ve had better data of late and some positive rumbling out of Europe, but there is still pent-up demand for Treasuries, and you see that at the auctions amid the uncertainty.”

Thirty-year yields rose 14 basis points, or 0.14 percentage point, to 2.93 percent at 5:10 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 2.78 percent yesterday, the lowest level since Oct. 4, after falling 26 basis points last week. The 3.125 percent debt due in November 2041 slid 2 29/32, or $29.06 per $1,000 face amount, to 103 30/32.

Current five-year note yields increased five basis points to 0.86 percent, and benchmark 10-year yields jumped 11 basis points to 1.92 percent after falling to 1.80 percent yesterday.

Five-year notes have returned 9.2 percent this year, compared with 10 percent for the broader Treasury market, according to Bank of America Merrill Lynch indexes.

Demand Gauge

At today’s note auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.86, versus an average 2.85 at the past 10 sales and 3.15 at the November offering. The average forecast for the yield was 0.885 percent in a Bloomberg News survey of seven primary dealers.

Last month’s offering of five-year notes drew a then- record low yield of 0.937 percent.

Indirect bidders, an investor class that includes foreign central banks, bought 50.6 percent of the notes today, the most since August 2010. They averaged 42.1 percent at the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 9.1 percent, the least since May.

Four-Week Bills

The government’s sale of four-week bills today had a bid- to-cover ratio of 9.07, a record high. The previous record was 7.66 on Dec. 6.

The U.S. will sell $29 billion of seven-year notes tomorrow. It auctioned $35 billion of two-year securities yesterday, drawing a yield of 0.24 percent, up from a record low 0.222 percent in August.

“Demand for Treasuries at auctions is as robust as ever, as so much uncertainly from Europe and the domestic economy continues to persist,” said Thomas Simons, a government debt economist in New York at the primary dealer Jefferies Group Inc. “All bets are off for tomorrow’s auction. It should come in well, but we are in a very weird market with the risk-on, risk- off mentality ahead of the holidays where trading has been thin.”

The government auctioned $78 billion last week in notes, bonds and inflation-linked debt. It sold $12 billion in five- year Treasury Inflation Protected Securities Dec. 15 at a record low yield of negative 0.877 percent. A $13 billion sale of 30- year bonds Dec. 14 drew a record low yield of 2.925 percent and a bid-to-cover ratio of 3.05, the highest in 11 years. Auctions of 10- and three-year notes also drew higher-than-average demand as investors sought refuge from European sovereign-debt turmoil.

Spanish Bonds

Treasuries fell earlier today as Spanish 10-year yields dropped to a two-month low of 5.06 percent, down from 6.78 percent on Nov. 17. The European Central Bank offered unlimited three-year loans to the region’s banks. Spain sold 5.64 billion euros ($7.4 billion) of the three- and six-month bills, exceeding its maximum target of 4.5 billion euros. Italian two- year note yields decreased for a fourth day and reached 4.91 percent, the lowest since Oct. 31.

The Ifo institute’s index of Germany’s business climate rose to 107.2 from 106.6 in November, the Munich-based group said. Economists in a Bloomberg survey forecast a drop to 106.

‘Risk Is On’

“The information out of Europe is good, and it led people to think risk is on for today,” said William O’Donnell, head U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, a primary dealer. “Even though the European authorities haven’t addressed the core issue of solvency, the liquidity measures are starting to gain traction.”

U.S. housing starts increased 9.3 percent to a 685,000 annual rate, the highest level since April 2010, Commerce Department figures showed today in Washington.

Stocks climbed, with the Standard & Poor’s 500 Index gaining 3 percent, the most this month.

Consumer spending rose in November, adding 0.3 percent, a Bloomberg survey of economists showed before a Commerce Department report due Dec. 23.

The difference in yield between 10-year Treasuries and inflation-protected debt, a measure of the outlook for consumer prices known as the break-even rate, increased to as much as 2.04 percent, the widest in a week on an intraday basis.

The Fed purchased $2.512 billion of Treasuries today due from February 2036 to May 2041 as part of a plan announced in September to replace $400 billion of shorter maturities in its holdings with longer-term debt to cap borrowing costs and support the economy.

--Editors: Greg Storey, Dave Liedtka

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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