Bloomberg News

Treasury Bonds Decline a Fifth Day Before Fed Policy Meeting

January 24, 2012

Jan. 24 (Bloomberg) -- Treasury bonds fell for a fifth day as investors speculated whether the first release of policy makers’ expectations for borrowing rates will offer insight into when the Federal Reserve will begin tightening monetary policy.

The U.S. government’s $35 billion auction of two-year notes drew stronger-than-average demand, suggesting that Treasuries will retain their refuge appeal as talks to restructure Greece’s debt reach a stalemate. The Fed has left its target for overnight loans between banks in a range of zero to 0.25 percent since 2008 and last month reiterated that economic conditions may warrant “exceptionally low” rates at least through mid-2013.

“There is a lot of uncertainty about how the rates guidance will be shaped up at the FOMC meeting,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trade with the Fed. “The possibility that it could change has been a main driver of the fluctuations we are seeing.”

Yields on the 30-year bond rose one basis point, or 0.01 percentage point, to 3.14 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in November 2041 fell 9/32, or $2.81 per $1,000 face amount, to 99 20/32.

The benchmark 10-year yield rose one basis point to 2.06 percent. The yield on the current two-year note was little changed at 0.23 percent. It has traded in a range of 0.21 percent to 0.28 percent this year.

‘Exceptionally Low’

The central bank is forecast to keep the key rate unchanged at tomorrow’s policy meeting, a Bloomberg survey shows. After the FOMC meeting tomorrow, policy makers will provide an explanation for their assessments along with their rate forecasts.

“There has been bearish momentum in the markets,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, a primary dealer. “The market is stepping on the brake ahead of the FOMC meeting as it deals with the question of, is there less room for the Fed to provide easing? And the prospect of supply doesn’t’ help either.”

This week’s note sales, including last week’s $15 billion auction of 10-year inflation indexed notes, will raise $56.5 billion of new cash, as maturing securities total $57.5 billion.

Bid-to-Cover

The two-year auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.75, versus an average of 3.43 for the previous 10 sales. The size of the offering was the same as at the past 15 sales of the two-year maturity after peaking at $44 billion from October 2009 through April 2010. The securities mature in January 2014.

Indirect bidders, an investor class that includes foreign central banks, purchased 32.9 percent of the notes, compared with an average of 32.3 percent for the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 8.3 percent of the notes, compared with an average of 14.2 percent at the last 10 auctions.

Two-year notes returned 0.03 percent this year, compared with a 0.78 percent loss for the broader Treasury market, according to Bank of America Merrill Lynch indexes.

“There is still demand for the front end given the uncertainties around the globe and the stance the Fed has taken,” said Jefferies’s Simons.

$99 Billion

The note offering was the first of three this week totaling $99 billion. The Treasury will sell $35 billion in five-year debt tomorrow and $29 billion of seven-year securities on Jan 26.

“We’ve seen a consistent flight away from quality this year as fears coming from Europe have receded some,” said Larry Milstein, managing director in New York of government and agency-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. Investors should “use this opportunity to buy the weakness in the market as it’s hard to be a believer that Europe is on its way to solving its problems.”

The Fed bought $4.93 billion of Treasuries as part of its program to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

The International Monetary Fund cut its forecast for the global economy as Europe slips into a recession and growth cools in China and India. Finance ministers balked at putting up more public money for Greece and called on bondholders to provide greater debt relief, spurring concern the nation may fail to make a March 20 bond payment.

S&P would still consider any debt relief being negotiated as a default, according to John Chambers, managing director of sovereign ratings.

--With assistance from Kenneth Pringle in New York. Editors: Kenneth Pringle, Dave Liedtka

To contact the reporter on this story: 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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