Bloomberg News

Treasuries Rise for First Time in Four Days on Greece, Auction

February 22, 2012

Feb. 22 (Bloomberg) -- Treasuries rose for the first time in four days on speculation Europe’s rescue package for Greece won’t resolve the region’s debt crisis and as the U.S. sold $35 billion of five-year notes.

U.S. 10-year notes yields fell from a four-week high as Fitch Ratings lowered Greece’s credit rating and said a default is highly likely. The Federal Reserve bought $1.84 billion of longer-maturity Treasuries today. The U.S. will sell $29 billion in seven-year notes tomorrow, the final of three auctions this week totaling $99 billion.

“The focus has been on what’s going on in Greece; The agreement that made news yesterday didn’t represent a final solution to the problem,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “ The five-year auction was reasonably well bid and we’re seeing the afterglow.”

The yield on the current five-year note fell five basis points, or 0.05 percentage point, to 0.86 percent, at 4:59 p.m. in New York, according to Bloomberg Bond Trader Prices. The 0.875 percent securities maturing in January 2017 rose 7/32, or $2.19 per $1,000 face amount, to 100 2/32.

The yield on the benchmark 10-year note fell six basis points to 2 percent after touching 2.08 percent, the most since Jan. 24.

Note Sale

The five-year notes sold today drew a yield of 0.900 percent, compared with a forecast of 0.901 percent in a Bloomberg News survey of seven of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.89, compared with an average of 2.9 for the previous 10 sales.

“The auction was nothing really special -- it was ham-on- rye,” said Thomas Roth, senior trader in New York at Mitsubishi UFJ Securities USA Inc.

Indirect bidders, an investor class that includes foreign central banks, purchased 41.8 percent of the notes, the least since July, and compared with an average of 43.8 percent for the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 12.9 percent of the notes, compared with an average of 11.7 percent at the last 10 auctions.

“The five-year note auctions of late have all gone fairly well, and this auction performed in line,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., a primary dealer. “It came and went and was decent.”

Debt Returns

Five-year notes have lost 0.1 percent so far this year, compared with a 0.7 percent loss for the broader Treasury market, according to Bank of America Merrill Lynch indexes, as of yesterday.

Seven-year notes may become less coveted in the short-term market for borrowing and lending securities after the government auctions more of the debt.

The overnight repo rate for the current seven-year note opened at negative 1.9 percent and traded at negative 2.5 percent at 9 a.m. before closing at negative 2.02 percent, according to data from ICAP Plc, the world’s largest inter- dealer broker. The overnight general collateral Treasury repurchase rate closed at 0.12 percent.

Traders have been willing to pay to borrow the securities in exchange for loaning cash for the most actively traded seven- year note, which is the 1.25 percent security that matures in January 2019.

Repo Market

Typically, lenders of cash receive interest on those loans, represented by a positive repurchase agreement, or repo, rate. Many times traders short, or sell securities they’ve borrowed in the repo market, ahead of a Treasury sale to profit if prices of the securities fall after the auction.

The Treasury sold $35 billion in two-year debt yesterday and will sell seven-year notes tomorrow.

This week’s note auctions and last week’s sale of $9 billion of 30-year Treasury Inflation Protected Securities will raise $47.8 billion of new cash as maturing securities held by the public total $60.2 billion.

Investing in U.S. government bonds is the least attractive investment in a world of “financial repression,” said Leon Cooperman, chief executive officer of Omega Advisors Inc.

No Value

“With a 2 percent government bond, if we’re talking about marginal tax rates, you’re keeping 60 percent of your 2 percent -- you’re keeping 1.2 percent,” Cooperman said in an interview with Erik Schatzker on Bloomberg Television’s “InsideTrack.” “The rate of inflation is somewhere in the range of 2 to 3 percent, so your capital is being confiscated. It makes no sense.”

Sales of previously owned U.S. houses rose in January to the highest level since May 2010, adding to signs the housing market is regaining its footing. Purchases climbed 4.3 percent to a 4.57 million annual rate, less than forecast, from a revised 4.38 million pace in December that was slower than previously estimated, a report from National Association of Realtors showed today in Washington.

The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs and spur the economy under a program it plans to conclude in June.

Fed Buys

The central bank bought $1.84 billion securities due from February 2036 to August 2041 today under the program, according to the New York Fed’s website.

Europe is still struggling to avoid the threat of default as investors warn Greece will soon risk violating the terms of the second bailout it was granted yesterday. Even with investors and central bankers helping relieve the debt burden, economists from Citigroup Inc. to Commerzbank AG concluded Greece may again fail to deliver amid a fifth year of recession.

Greece’s downgrade by Fitch Ratings to C from CCC is the first in a series of ratings cuts that the nation can expect after it negotiated the biggest sovereign debt restructuring in history.

“There’s no optimism and that’s why Treasuries are being bid,” said Roth of Mitsubishi. The Greece agreement is “discounted a bit because people believe it may turn into another debacle.”

--Editors: Paul Cox, Dave Liedtka

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; or 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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