April 10 (Bloomberg) -- Treasury (USGG3YR) 10-year yields fell below 2 percent for the first time in almost a month amid speculation the European sovereign-debt crisis is worsening as yields on Spanish and Italian bonds rose.
Treasury securities remained higher after the U.S. sold $32 billion of three-year notes, with the class of bidders that includes foreign central banks taking 40 percent of the debt, its largest share since August. The notes drew a yield of 0.427 percent, compared with a forecast of 0.424 percent in a Bloomberg News survey of 10 of the Federal Reserve’s 21 primary dealers.
“It’s definitely a risk-off day,” said William O’Donnell, head U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities in Stamford, Connecticut, one of the primary dealers required to bid at the auctions. “We think it’s going to continue. The return of European stress has legs.”
The yield on the current three-year note fell three basis points, or 0.03 percentage point, to 0.41 percent, at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 0.375 percent securities maturing in March 2015 rose 3/32, or 94 cents per $1,000 face amount, to 99 29/32.
The yield on the benchmark 10-year note fell seven basis points to 1.98 percent, touching the least since March 7. The yield hadn’t traded below 2 percent since March 12, the day before the Fed raised its assessment of the U.S. economy in its March 13 policy statement.
An index of U.S. financial conditions is signaling a slowdown after having crossed over toward indicating growth on March 9.
The Bloomberg U.S. Financial Conditions Index has held below zero since April 6, after the Labor Department said the economy added 120,000 jobs in March, less-than-forecast. The measure fell to minus 0.27 after rising as high as 0.24 on March 19. The index touched minus 12.7 during the financial crisis in October 2008.
At today’s auction, the 40 percent awarded to indirect bidders compares with an average of 37 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 7.8 percent of the notes at the sale, compared with an average of 10.5 percent for the past 10 auctions.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.36, compared with an average of 3.37 for the past 10 sales.
“Rates have come down quite a bit and investors haven’t deserted the auction,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, a primary dealer. “Investors are taking a bit of a pause after the long rally, but there was a lot of strong participation. The next few auctions should go well.”
The Treasury is selling $66 billion in notes and bonds this week. It’s due to auction $21 billion of 10-year securities tomorrow and will sell $13 billion of 30-year debt on April 12.
Three-year notes have lost 0.1 percent this year, compared with a 0.4 percent loss for Treasuries overall, according to Bank of America Merrill Lynch indexes.
Trading volume declined yesterday, with about $166 billion of Treasuries changing hands through ICAP Plc, the world’s largest interdealer broker, the lowest for a full-day since March 26. Volume reached $439 billion on March 14, the highest since August. The average in 2012 is $251 billion.
The gap between Spanish and German 10-year yields widened to 4.28 percentage points, the most since November, after Spanish Prime Minister Mariano Rajoy’s unexpected announcement yesterday that he would cut an additional 10 billion-euros ($13 billion) in education and health spending failed to ease concern in the bond market that the nation may become the fourth euro member to need a bailout.
The Fed has purchased $2.3 billion of mortgage and Treasury debt in two separate rounds of asset purchases intended to stimulate the economy, known as quantitative easing.
“There’s renewed concern about Europe, there’s evidence the economy may be succumbing to higher gasoline prices and a higher expectation of a Fed QE3 operation,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.
Crude oil for May delivery rose to as high as $102.96 a barrel on the New York Mercantile Exchange, and is up.
U.S. corporate profit growth stalled in the U.S. last quarter as companies from McDonald’s Corp. to 3M Co. saw gains in the world’s largest economy eroded by a slump in Europe. Earnings at Standard & Poor’s 500 Index companies, excluding financials, are seen gaining 0.6 percent in the first and the second quarter from a year earlier, according to analysts’ estimates compiled by Bloomberg, the slowest growth rate since 2009.
The central bank on March 13 reiterated its previous statement that economic conditions would probably warrant “exceptionally low” interest rates at least through late 2014. It has kept its target rate for overnight bank loans to a range of zero to 0.25 percent since December 2008.
The Fed bought $4.76 billion in Treasuries maturing from April 2018 to November 2019 in its second open-market operation as part of its plan to lower borrowing costs known as Operation Twist. Earlier it purchased $1.84 billion of notes due in February 2036 to May 2041.
The central bank is replacing $400 billion of short-term debt in its portfolio with longer-term Treasuries to limit borrowing costs and counter risks of a recession.
The 10-year yield has plunged by more than 40 basis points in the 15 trading days since reaching an almost-five-month high of 2.40 percent on March 20.
“The 2.40 was a number of things,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, which manages $12 billion. “Resolution on Greece, more optimism on the economy as well as the reduced probability of a QE3. All of those three things have turned, and that’s why you saw a 40-basis-point rally.”
To contact the reporters on this story: Daniel Kruger in New York at firstname.lastname@example.org; Cordell Eddings in New York at email@example.com
To contact the editor responsible for this story: Paul Cox at firstname.lastname@example.org