Bloomberg News

Interest Payments May Fuel Treasury Demand, Bank of America Says

February 02, 2012

Jan. 31 (Bloomberg) -- Interest payments by the Treasury, which rise during February for 10- and 30-year securities, will boost demand for the debt during next month’s sales, according to Bank of America Corp.

Purchases resulting from the Treasury’s payments to investors will rise 825 percent to the equivalent a $37 billion increase in demand for 10-year notes, up from $4 billion in January, while the Federal Reserve is also buying longer-term securities, wrote Shyam Rajan and Priya Misra, head of U.S. interest rates strategists in New York at Bank of America Merrill Lynch, in a note to clients today.

Interest payments to holders of 10- and 30-year securities, when combined with central bank purchases to bolster the economy, will likely boost demand for the longest-maturity Treasury securities, the analysts wrote. That was the case when the gap between two- and 10-year yields on U.S. government securities narrowed last year to 2.74 percentage points Feb. 28 from 2.84 percentage points Feb. 1, while the gap between two- year notes and 30-year bonds narrowed to 3.82 percentage points from 4.01 percentage points during the same period.

The greatest “market impact is on the curve,” Rajan said in a telephone interview. Another by-product of the interest payments is that “you will not have the usual supply-based cheapening associated with the auctions,” Rajan said. The yield curve measures the difference between short- and long-term yields.

Bond Performance

A narrowing of the gap in yields between longer-term and shorter-term Treasuries suggests the 30-year bond will outperform other parts of the yield curve, Rajan said.

The 30-year bond has lost 1.6 percent this year, compared with a 0.1 percent gain for two-year notes and a 0.3 percent return for Treasuries of all maturities, according to Bank of America Merrill Lynch bond indexes.

The Treasury will announce tomorrow the sizes of three, 10- and 30-year debt to be sold on three consecutive days beginning Feb. 7. The Treasury has sold $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in bonds each refunding month since November 2010. Quarterly refundings are held each February, May, August and November.

Investors bid $3.26 for each of the $180 billion of Treasury debt sold in January, compared with a record $3.04 for all of 2011 and $2.99 in 2010.

--Editors: Paul Cox, Dave Liedtka

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

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


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