Bloomberg News

Treasury 10-Year Yields Post 1-Week Low as Fed Buys, Oil Rises

February 24, 2012

Feb. 24 (Bloomberg) -- Treasury 10-year note yields reached a one-week low as the Federal Reserve bought $1.93 billion in longer-term securities and on concern a rise in oil may threaten economic growth.

The yield on the benchmark security had the first weekly drop in four weeks. The difference between the yields on 10-year notes and inflation indexed securities was close to the highest since August as a Commerce Department report show purchases of new U.S. homes declined in January while exceeding the forecast level. Oil climbed for a seventh day in the longest streak of advances since January 2010.

“The bond market is sniffing out what’s happening with oil and saying that if it happens, there may be a bit of a slowdown,” said Dan Greenhaus, chief global strategist at BTIG LLC in New York. “The bond market is in a cautious mode.”

Yields on 10-year notes fell two basis points, or 0.02 percentage point, to 1.98 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 increased 6/32, or $1.88 per $1,000 face amount to 100 7/32. The yield reached 1.97 percent, the least since Feb. 16. It’s down two basis points for the week.

Trading Range

Ten-year Treasury yields have been in a range of 1.79 percent to 2.16 percent since the start of November as Europe’s debt crisis sustained demand for the safest securities.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices during the life of the debt known as the break- even rate, widened to as much as 2.31 percentage points, close to the most since August. It has averaged 2.14 percentage points during the past decade.

Any rise in Treasury yields may be limited as the next round of Treasury note and bond supply will be on three consecutive days beginning March 12 when the government will sell three-, 10- and 30-year debt. The U.S. will announce the amounts on March 8.

The central bank purchased securities maturing from February 2036 to August 2041 today, according to the New York Fed website. The Fed is replacing $400 billion of shorter- maturity Treasuries in its holdings with longer-term debt to cap borrowing costs under a program it plans to conclude in June.

Fed View

Fed Bank of St. Louis President James Bullard said additional asset purchases, or quantitative easing, aren’t needed with inflation including food and fuel higher than the central bank’s 2 percent target.

“I wouldn’t take QE3 off the table ever,” Bullard said in a CNBC interview, referring to a third round of purchases. “We should use it only if the economy deteriorates and especially if the inflation numbers start to drift down into disinflation or deflation. Headline inflation is above target.”

“Bullard said he wouldn’t take QE3 off the table so that brought in some buying into the market,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.

Oil Futures rose to a nine-month high as sanctions against the Persian Gulf nation make it more difficult for Iran to sell crude. Crude rose 0.6 percent to $108.44 a barrel on the New York Mercantile Exchange.

Trading Data

Volume in the Treasury market yesterday remained below the one-year average of $275 billion. About $256 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker.

Hedge-fund managers and other large speculators increased their net-short position in 10-year note futures in the week ending Feb. 21, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 65,285 contracts on the Chicago Board of Trade. Net-short positions rose by 20,885 contracts, or 47 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed yesterday at 79 basis points, near the lowest level since July 2007. The five-year average is 112 basis points.

Sovereign Woes

U.S., Chinese and Japanese officials say they will press euro-area countries to do more to merit outside help when Group of 20 finance ministers and central bank governors gather in Mexico City tomorrow for a meeting dominated by Europe’s sovereign-debt woes, days after Greece secured a second bailout.

Greece’s debt restructuring may trigger credit-default swaps insuring $3.2 billion of bonds if the government uses clauses designed to mop up investors unwilling to take part.

Greece published the formal offer document today for its agreement to exchange bonds for new securities, with investors taking a haircut of 53.5 percent. The restructuring uses so- called collective action clauses to discourage holdouts, the use of which would trigger credit-default swap insurance contracts on the nation’s debt, according to the rules of the International Swaps & Derivatives Association.

Treasuries rose yesterday after a U.S. sale of $29 billion in seven-year notes drew stronger-than-average demand on concern Europe’s debt crisis hasn’t been contained.

The bid-to-cover ratio, which gauges demand by comparing orders to buy with the amount of securities offered, was 3.11, compared with an average of 2.81 for the previous 10 sales. The auction was the last of three note offerings this week totaling $99 billion.

A $35 billion U.S. five-year auction Feb. 22 drew a yield of 0.9 percent, compared with a forecast of 0.901 percent in a Bloomberg survey of seven primary dealers, while a two-year note auction the previous day drew a yield of 0.310 percent, matching pre-auction trading.

New home sales, tabulated when contracts are signed, fell 0.9 percent to a 321,000 annual pace from a 324,000 rate in December that was stronger than previously reported, figures from the Commerce Department showed today in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a rise to 315,000. The number of homes for sale dropped to a record low.

--With assistance from Tony Czuczka in Berlin. Editors: Paul Cox, Kenneth Pringle

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

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


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