Bloomberg News

Treasuries Fall as U.S. Sells Notes Amid Fed Speculation

June 12, 2012

Treasuries fell as the U.S. sold $32 billion of three-year notes and traders speculated that Federal Reserve officials may add to stimulus to keep the economic recovery from faltering.

The securities drew a yield of 0.387 percent, compared with a forecast of 0.383 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. Bonds had pared losses earlier after Fitch Ratings cut the ratings of 18 Spanish banks, boosting the refuge appeal of U.S. government securities. The U.S. will sell $21 billion of 10-year securities tomorrow and $13 billion of 30-year debt the next day.

“The supply is going to have an impact because the market now is expensive,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “It doesn’t make sense to buy at these levels. That’s what happens when you get to extreme valuations. You need more bad news to keep yields down.”

The yield on the benchmark 10-year note rose eight basis points to 1.67 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader data prices. The 1.75 percent note due May 2022 dropped 23/32, or $7.19 per $1,000-face amount, to 100 24/32.

The yield on the current three-year note rose four basis points, or 0.04 percentage point, to 0.4 percent, at 4:59 p.m. in New York, according to Bloomberg Bond Trader Prices.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.65, compared with an average of 3.43 for the past 10 sales.

Bid Detail

Indirect bidders, an investor class that includes foreign central banks, purchased 27 percent of the notes, compared with an average of 37.6 percent for the past 10 sales.

“The auction was good, but not great,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “They had buyer’s fatigue. You have a marketplace where yields are close to their lows and it’s possible Europe may get their act together.”

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 12 percent of the notes at the sale, compared with an average of 9.8 percent for the past 10 auctions.

The Treasury is selling $66 billion in notes and bonds this week. The sales will raise $35.3 billion of new cash as maturing securities held by the public total $30.7 billion, according to the U.S. Treasury.

The central bank, which meets June 19-20, bought $2.3 trillion of bonds in two rounds of so-called quantitative easing, or QE, from December 2008 to June 2011 to cap borrowing costs and stimulate the economy.

Fed Purchases

The Fed purchased $1.88 billion of Treasuries due from February 2036 to August 2041 today under its program known as Operation Twist, which aims to replace holdings of shorter-term securities with longer-term bonds, according to the Fed Bank of New York’s website.

Fed Bank of Chicago President Charles Evans said he would support a variety of measures to generate faster job growth, underscoring his preference for more stimulus.

“I’ve been in favor of pretty much any accommodative policy I’ve heard about,” Evans, who doesn’t vote on the Federal Open Market Committee this year, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu.

U.S. government securities gained 3.2 percent this quarter through yesterday, compared with a 1.9 percent return on the nation’s corporate debt, Bank of America Merrill Lynch data showed.

Fitch Downgrades

Fitch downgraded the long-term issuer default ratings on Spain’s banks, citing concern about the potential for loan portfolios to deteriorate further.

“People think the whole crisis will get worse before it gets better,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., a primary dealer. “I don’t see any optimism.”

A valuation measure showed U.S. government bonds are at almost the most expensive levels ever. The term premium, a model created by economists at the Federal Reserve, was at negative 0.81 percent after reaching negative 0.94 percent, the record, on June 1. The average during the past year is negative 0.46. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Treasuries investors raised bets the price of the securities will drop and remained “net short” for a second week, according to a survey by JPMorgan Chase & Co.

The proportion of net shorts was unchanged at six percentage points in the week ending June 11 as outright shorts rose to 19 percent from 17 percent the previous week and outright longs rose to 13 percent from 11 percent. A short position is a bet that an asset will decrease in value, while a long is a wager it will increase.

The number of neutrals dropped to 68 percent from 72 percent.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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


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