Bloomberg News

Treasuries Rally as U.S. Prepare Two-Year Note Auction

March 27, 2012

Treasuries rose as the government was poised to sell $35 billion in two-year securities at the highest yield since July and reports showed declines in consumer confidence and home prices.

U.S. 30-year bonds advanced as the Federal Reserve purchased $1.97 billion in longer-term debt. Pacific Investment Management Co.’s Bill Gross said continued credit expansion by central banks will produce accelerating global inflation and slower growth.

“You’ll have reasonable demand for the auction; I don’t think it’ll be a problem,” Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc., said in a telephone interview. “Those were very aggressive levels we were at, and we’ve come off them marginally.”

Yields on 30-year bonds declined two basis points, or 0.02 percentage point, to 3.32 percent at 12:17 p.m. New York time, according to Bloomberg Bond Trader prices. The 3.125 percent securities due in February 2042 rose 14/32, or $4.38 per $1,000 face amount, to 96 13/32.

Benchmark 10-year note yields dropped four basis points to 2.21 percent. They touched 2.19 percent, the lowest level since March 14. Ten-year yields increased two basis points yesterday and have climbed 24 basis points in March in what would be the biggest gain since December 2010.

Yields on two-year notes in pre-auction trading were 0.350 percent, the most since July 29. The securities drew a yield of 0.310 at the last two-year auction on Feb. 21.

Bernanke on Accommodation

Treasuries fell yesterday as Fed Chairman Ben S. Bernanke buoyed investor risk appetite by saying accommodative policy is still needed to reduce joblessness.

“Further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,” Bernanke said Arlington, Virginia.

Volatility declined yesterday for a fourth day. Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options, fell to 85.6. It reached 93.3 on March 20, the highest this year. The volume of Treasury trades handled through ICAP Plc, the biggest broker between banks, fell yesterday to about $159 billion, the lowest since Jan. 9.

Treasuries have lost 1.4 percent in 2012, their biggest quarterly decline since the last three months of 2010, according to indexes compiled by Bank of America Merrill Lynch.

‘Wake-Up Call’

“Today’s trade is a follow-up from yesterday’s Bernanke speech,” Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of the 21 primary dealers that trade with the Fed, said in a telephone interview. It’s “another wake-up call to the market that the head of the Fed has no interest in raising rates until such point as he sees the economy growing strongly.”

U.S. debt securities fell on March 13, when the central bank increased its assessment of the economy while reiterating its pledge to keep borrowing costs low at least until late 2014.

Gross said in his monthly investment outlook posted on Pimco’s website today that the world’s bigger manager of bond funds favors shorter-duration and inflation-protected debt as well as dividend-paying equities with a preference for developing markets.

Inflation-linked Treasuries have lost 1.3 percent this month as of March 26, compared with 1.2 percent decline for Trasuries overall, according to Bank of American Merrill Lynch indexes. Inflation-protect U.S. government debt returned 14.1 percent last year while Treasuries gained 9.8 percent.

‘Must Take Risk’

“When interest rates cannot be dramatically lowered further or risk spreads significantly compressed, the momentum begins to shift, not necessarily suddenly, but gradually yields moving higher and spreads stabilizing or moving slightly wider,” Gross, the founder of Pimco, wrote. “In such a mildly reflationary world, unless you want to earn an inflation- adjusted return of minus 2 percent to 3 percent as offered by Treasury bills, then you must take risk in some form.”

Today’s Treasury sale is the first of three offerings this week totaling $99 billion in two-, five- and seven-year notes.

Investors at the last two-year note auction on Feb. 21 bid for 3.54 times the amount of available debt last month, versus the average of 3.53 for the past 10 auctions. Indirect bidders, the category of buyers that includes foreign central banks, purchased 35.8 percent, the most since November.

The government is scheduled to sell $35 billion of five- year notes tomorrow and $29 billion of seven-year securities on March 29.

Fed Purchase

The Fed bought Treasuries today due from February 2036 to May 2041 under a plan announced in September to cap borrowing costs by replacing $400 billion of shorter maturities in its holdings with longer-term debt.

Treasury investors in a weekly survey by JPMorgan Chase & Co. reduced expectations that prices of Treasuries would rise, increasing so-called neutral positions to the highest level since Feb. 21.

The percent of “net longs” dropped to 4 percent in the week ended yesterday, from 10 percent last week, while the number of outright neutrals in the firm’s “all clients” survey rose to 66 percent, JPMorgan wrote in a report today.

The S&P/Case-Shiller index of property values in 20 cities fell 3.8 percent from a year earlier, matching the median forecast of 32 economists surveyed by Bloomberg News, after decreasing 4.1 percent in December, a report from the group showed today in New York. Prices were little changed in January from the prior month, the best performance since July.

The Conference Board’s confidence index dropped to 70.2 from a revised 71.6 reading in February that was higher than initially reported, figures from the New York-based private research group showed today. The median forecast of economists surveyed by Bloomberg News called for a decrease to 70.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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


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