Bloomberg News

Treasuries Decline as Haven Demand Ebbs Before Talks

May 22, 2012

May 22 (Bloomberg) -- Treasuries fell on reduced demand for haven assets before European leaders meet tomorrow in Brussels to address the region’s fiscal crisis.

U.S. 10-year note yields rose for a third day, the longest streak in two months after falling to almost record lows last week. Treasuries remained lower even as the U.S. sale of $35 billion in two-year notes was met with stronger-than-average demand. The U.S. will sell five-year notes tomorrow, the second of three auctions totaling $99 billion.

“The market has been a little ahead of itself and as such is a little overbought,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that are required to bid at the auctions. “A lot of that sentiment is driven by headlines from across the pond.”

The benchmark 10-year yield rose five basis points, or 0.05 percentage point, to 1.79 percent at 2:24 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 declined 14/32, or $4.38 per $1,000 face amount, to 99 20/32.

The yield dropped to 1.6886 percent on May 17, approaching the record low 1.6714 percent set Sept. 23. It declined 12 basis points last week.

Fewer Bullish Bets

Treasuries investors cut bets the securities will advance, and raised neutral and short positions this week, according to a weekly survey by JPMorgan Chase & Co.

The percent of “net longs” dropped to four percentage points in the week ending yesterday, from 11 percentage points the previous week when it reached the highest level in more than two months. The number of outright longs dropped to 21 percent in the week ending yesterday, from 26 percent, the survey showed.

The yield on the current two-year note rose one basis point to 0.29 percent. The securities sold today drew a yield of 0.300 percent, matching the average forecast in a Bloomberg News survey of nine of the Federal Reserve’s 21 primary dealers.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.95, the most since a record high 4.07 in November, and compared with an average of 3.62 for the past 10 sales.

Auction Demand

“It was a tremendous auction,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of the primary dealers obligated to bid in U.S. debt auctions. “The most important factor driving demand is the European situation.”

Indirect bidders, an investor class that includes foreign central banks, purchased 33.5 percent of the notes, compared with an average of 33.4 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 9 percent of the notes at the sale, compared with an average of 12.9 percent for the past 10 auctions.

U.S. two-year notes have gained 0.03 percent this year, compared with a 1.3 percent gain for Treasuries overall, according to Bank of America Merrill Lynch indexes.

The Treasury is due to auction $35 billion of five-year securities tomorrow and sell $29 billion of seven-year debt on May 24. This week’s note offerings, combined with the May 17 auction of $13 billion in 10-year Treasury Inflation Protected Securities, will raise $52.9 billion of new cash, as maturing securities held by the public total $59.1 billion.

German Zeros

Germany will borrow for free at a sale of two-year government notes tomorrow, betting it can lure buyers seeking a haven from the European debt crisis.

Germany, the only country in the euro area with a stable outlook on its AAA rating, will sell as much as 5 billion euros ($6.4 billion) of two-year notes carrying a zero-percent coupon, a record low, Bundesbank data showed today. That’s down from a fixed interest payment of 0.25 percent at the previous sale of similar-maturity notes on April 18.

European Union leaders are scheduled to meet tomorrow in Brussels amid speculation Greece will quit the euro. They plan to address the region’s fiscal crisis, damping demand for the safest securities.

“There’s hope in Europe with the meeting tomorrow,” said Thomas Roth, senior trader in New York at Mitsubishi UFJ Securities USA Inc. “The market has only been able to be long because of the headline risk in Europe. You get to levels where you just can’t sustain those moves, and we’re at those levels.”

Yield Forecast

The yield on the 10-year note will end the year at 2.4 percent, according to the median forecast of 69 economists in a Bloomberg News survey.

Purchases of previously owned houses, tabulated when a contract closes, increased 3.4 percent to a 4.62 million annual rate, figures from the National Association of Realtors showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a rise to a 4.61 million rate.

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents expectations for the rate of inflation during the life of the securities, increased for a third day. It climbed to as much as 2.21 percentage points today, the most since May 8.

Volatility yesterday dropped to 69.1 basis points from 70.6 basis points on May 18, according to Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options. The gauge is below the one-year average of 87.94 basis points.

Trading volume dropped yesterday to the lowest since May 11. About $166 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker. The average in 2012 is $242 billion. Volume reached $439 billion on March 14, the highest since August.

The Fed sold $8.6 billion of Treasuries due from March to September 2013 as part of its $400 billion debt-swap program, according to the Fed Bank of New York’s website.

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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