Bloomberg News

Treasury Yield Gap Shrinks as 30-Years Climb on Crisis Concern

December 30, 2011

Dec. 19 (Bloomberg) -- The Treasury yield difference between two- and 30-year securities shrank to the least since October as investors sought safety on bets Europe’s debt crisis will worsen and the U.S. sold $35 billion of two-year notes.

Thirty-year bonds climbed, pushing yields to the lowest in almost three months, on concern European leaders are failing to make progress on taming the crisis. U.S. two-year notes were little changed after the auction. Its bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt sold, was 3.45, versus a 3.38 average at the past 10 offerings.

“We are seeing a slow, steady rally on the back end of the curve that is leading to a flatter curve, and it doesn’t look like that is going to change much going into the year’s end,” said Scott Sherman, an interest-rate strategist in New York at Credit Suisse Group AG, which as one of the Federal Reserve’s 21 primary dealers must bid in U.S. debt sales. “There is still uneasiness, and thus people are taking risk off the table.”

The gap between yields on two- and 30-year securities, known as the yield curve, narrowed to 255 basis points, the least since Oct. 3. It reached a 2011 high of 402 basis points in February, and the average for this year is 350 basis points.

Current U.S. two-year note yields decreased one basis point, or 0.01 percentage point, to 0.23 percent at 5:15 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 0.25 percent securities due in November 2013 slipped 1/32, or 31 cents per $1,000 face amount, to 100 1/32.

Thirty-year bond yields tumbled seven basis points to 2.79 percent and touched 2.78 percent, the lowest level since Oct. 4.

Rescue Programs

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said the first part of 2012 will be “risk off” as Europe’s debt crisis roils markets. Newport Beach, California-based El-Erian spoke in an interview with Tom Keene on Bloomberg Television’s “Surveillance Midday.”

Thirty-year securities extended gains as Dow Jones reported euro-area finance ministers failed to agree on raising the joint ceiling for the region’s two rescue programs, the European Stability Mechanism and European Financial Stability Facility. The news service cited a European Union source.

The finance chiefs met a target today for boosting Europe’s anti-crisis warchest with a pledge to provide 150 billion euros ($195 billion) to the International Monetary Fund.

Four non-euro users -- the Czech Republic, Denmark, Poland and Sweden -- will also pitch in, Luxembourg Prime Minister Jean-Claude Juncker said in an e-mailed statement after chairing a teleconference of finance ministers. The U.K. will “define its contribution” in early 2012, according to the statement.

Three-month Treasury bill rates dropped below zero for a fourth consecutive day, closing at negative 0.0051 percent.

Auction Yield

The notes sold at today’s auction drew a yield of 0.240 percent, matching the average forecast in a Bloomberg News survey of eight primary dealers. Last month’s offering of two- year notes drew a yield of 0.28 percent and a record-high bid- to-cover ratio at the last auction of 4.07. The record auction low of 0.222 percent was reached in August.

Indirect bidders, an investor class that includes foreign central banks, purchased 21.6 percent of the notes at today’s sale, compared with an average of 33.3 percent for the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 14.7 percent, versus an average of 13.4 percent at the past 10 sales.

More Auctions

The U.S. will sell $35 billion of five-year securities tomorrow and $29 billion of seven-year notes on Dec. 21. The amounts are unchanged from the last offerings of the maturities auctioned in November.

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 and $13 billion in 30-year bonds Dec. 14 at a record low yield of 2.925 percent, drawing 3.05 times the bids as the amount sold, the highest level since August 2000. Auctions of 10- and three-year notes also drew stronger-than-average demand as investors sought refuge amid speculation France will be downgraded and concern European leaders are struggling to resolve the crisis.

The Fed purchased $4.898 billion of Treasuries due in 2018 today 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.

“There still seems to be a need for Treasuries in the back end of the market, as people are reaching for yield toward the end of the year given the general risk aversion in the atmosphere, even at these incredibly low yields,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker.

Yield Outlook

The yield on the two-year note will end the year at 0.27 percent, according to the median forecast of 58 economists in a Bloomberg News Survey. The 30-year yield will be 3.10 percent, according to the median projection for that maturity.

Benchmark 10-year note yields may touch 1.5 percent in the first half of 2012 amid slow growth, the threat of a worsening crisis in Europe and a lack of inflation, Dominic Konstam, head of interest-rate strategy at the primary dealer Deutsche Bank AG in New York, wrote in a note to clients.

“It has to be worse before it can be better,” he wrote.

Treasury supply probably will “remain stable near term” because of uncertainty on fiscal policies, Konstam wrote.

--Editors: Greg Storey, Kenneth Pringle

To contact the reporters on this story: Susanne Walker in New York at; Cordell Eddings in New York at

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

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