Bloomberg News

Treasuries Drop on Concern Refuge Demand Pushed Yields

May 10, 2012

Treasuries fell for the first time in five days amid concern investors seeking refuge from Europe’s financial turmoil may have pushed U.S. government yields too low, curbing demand for the securities.

U.S. debt pared losses after JPMorgan Chase & Co. said it lost about $2 billion tied to synthetic credit securities after positions taken by its chief investment office were riskier than expected. Treasuries gained from their lowest levels of the day after a $16 billion auction of 30-year bonds drew stronger-than- average bidding.

“The market got a little ahead of itself,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “It can be viewed as a positive sign if there’s no major bearish news coming out of Europe. Today was about the setup for the auction.”

The yield on the current 30-year bond rose two basis points, or 0.02 percentage point to 3.04 percent, at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent bond due in February 2042 fell 10/32, or $3.13 per $1,000 face amount, to 101 5/8.

The yield rose as much as eight basis points earlier. It dropped to 2.98 percent yesterday, a level last seen on Feb. 2.

Yields Advance

Ten-year note yields climbed four basis points to 1.87 percent after rising as much as 10 basis points, the biggest gain since April 3. Yields dropped to 1.79 percent yesterday, the lowest level since Jan 31.

Treasuries pared losses in late afternoon as JPMorgan reported losses.

“This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed,” the New York-based company said in a quarterly securities filing.

Today’s bond auction drew a yield of 3.090 percent, compared with a forecast of 3.114 percent in a Bloomberg News survey of seven of the Federal Reserve’s primary dealers. The bond sale drew a bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, of 2.73, compared with an average of 2.67 for the previous 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 33.8 percent of the notes, compared with 30.7 percent of the notes at the April sale and an average for the past 10 offerings of 30 percent.

Auction Data

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 15.4 percent of the notes, compared with 13.4 percent of the notes at the last sale and an average of 17.5 percent for the past 10 auctions.

“There’s obviously demand for safe Treasury paper,” said Thomas Roth, senior trader in New York at Mitsubishi UFJ Securities USA Inc. “We’ve seen this through the whole debacle with Europe.”

Thirty-year bonds have lost 1.8 percent this year compared with a 0.6 percent return in the broader U.S. debt market after returning 35.5 percent last year, more than triple the 9.8 percent gain by the broader Treasury market, according to Bank of America Merrill Lynch indexes.

Today’s auction is the last of three Treasury note and bond offerings this week totaling $72 billion. The government announced today it would auction $13 billion of 10-year Treasury Inflation Protected Securities on May 17.

Fed Sales

The Fed sold $8.6 billion in notes due from October 2013 to January 2014 today as part of a program known as Operation Twist. The sales are part of the central bank’s effort to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to hold down borrowing costs.

The difference between the 10-year swap rate and the yield on similar-maturity U.S. debt narrowed for the first time in three days to 13.25 basis points. It widened yesterday to as much as 18 basis points, the most since December.

Swap rates are usually higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk. Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

Demand for a refuge from Europe’s turmoil helped the U.S. sell $24 billion of 10-year notes at 1.855 percent yesterday, a record low for an auction. Ten-year yields dropped to 1.67 percent on Sept. 23, the least ever.

European Develoments

“European investors are looking for alternative safe havens where they can earn a little bit more and it’s coming into the Treasury market,” FTN Financial Chief Economist Christopher Low, the most accurate forecaster of Treasury note yields last year, said yesterday. “The combination of low growth and low inflation is beneficial for bonds everywhere, including U.S. Treasuries.”

Low was the only one among 70 analysts in a Bloomberg survey who predicted the yield would fall to 2 percent by the end of last year.

“It’s likely that the U.S. 10-year Treasury yield will work itself down to 1.5 percent by year-end,” said Low, who is based in New York.

As Greece faces political paralysis, a survey of 1,253 Bloomberg subscribers showed 57 percent of investors, analysts and traders predicted at least one country will abandon the euro by year-end. Political leaders remained divided on forming a new government, stoking concern another election may set the stage for the country’s exit from the currency union.

Budget Surplus

The U.S. government posted a budget surplus in April, the first in more than three years, as tax revenue climbed and spending dropped. It was the first surplus since September 2008 and the biggest since April 2008.

Receipts topped outlays by $59.1 billion compared with a deficit of $40.4 billion in April 2011, the Treasury Department said today. Economists projected a $35 billion surplus, according to the median estimate in a Bloomberg News survey.

Today’s 30-year bond auction was also supported by inflation projections.

A Labor Department report May 12 is forecast to show the consumer-price index in April climbed 0.1 percent, compared with 0.3 percent the prior month, according to economists in a Bloomberg News survey. The so-called core measure, which excludes more volatile food and energy costs, rose 0.2 percent, a separate survey showed.

The five-year, five-year forward break-even rate, a measure of traders’ inflation expectations that the Fed uses to help guide monetary policy was at 2.77 percent, below its 2012 high of 2.8 percent and less than its five-year average of 2.79 percent.

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