Bloomberg News

Treasuries Fall Amid Speculation on Prospects for Europe Crisis

June 26, 2012

Treasuries fell amid speculation whether European leaders are making progress toward resolving the euro bloc’s financial crisis.

The U.S. sold $35 billion in two-year notes at an auction that drew a yield of 0.313 percent, approaching the record low of 0.222 percent reached in August. Treasuries advanced from their lowest of the day after German Chancellor Angela Merkel rejected shared liability for debt. European Union leaders open a two-day summit on June 28.

“They are waiting for the next shoe to drop out of Europe to determine what their next position is going to be,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Everything is based on what’s going to happen out of Europe.”

Ten-year note yields increased two basis points, or 0.02 percentage point, to 1.63 percent at 5:13 p.m. in New York, according to Bloomberg Bond Trader prices. They added as much as five basis points to 1.65 percent. The price of the 1.75 percent security due in May 2022 declined 7/32, or $2.19 per $1,000 face amount, to 101 1/8.

The yield on the current two-year note rose one basis point to 0.31 percent and touched 0.3111 percent, the highest level since April 10.

Volume, Volatility

Trading volume jumped. About $225 billion of Treasuries changed hands as of 5:01 p.m. through ICAP Plc, the world’s largest interdealer broker, up 37 percent from yesterday’s $164 billion. Volume touched $396 billion on May 31, the highest level since March. The daily average over the past year is $253 billion.

Volatility declined for a sixth straight day yesterday, the longest stretch since March, according to Bank of America Merrill Lynch’s MOVE index. It fell to 72.8 basis points, the lowest level since May 29. The index measures price swings based on options. It dropped 20 basis points last week, the most since June 2009.

Treasuries trimmed their decline earlier as Spanish and Italian borrowing costs rose amid concern the EU summit will fail to solve the euro bloc’s sovereign-debt crisis.

“We are still near low yields levels as Europe is still forefront on everyone’s mind, and nothing is going to change that any time soon unless something in Europe changes,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, which as one of the 21 primary dealers is obliged to bid in Treasury sales.

Merkel Comments

Germany’s Merkel told lawmakers of her ruling coalition she “doesn’t see” shared debt happening in the euro area, according to Steffen Seibert, her chief spokesman.

An EU options paper for reshaping the euro bloc leans toward mutualizing debt and doesn’t say enough about imposing stricter controls on national budgets, German Deputy Foreign Minister Michael Link told reporters today.

“Merkel’s strong resistance to Eurobonds continues the bleak outlook coming from Europe,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The constant debate in Europe is keeping us near these low yield levels as we are still in the middle of a banking and sovereign debt crisis.”

Spain sold 3.08 billion euros ($3.85 billion) of bills, with the three-month note yielding 2.362 percent, compared with 0.846 percent at the previous auction. Italy sold 2.99 billion euros of zero-coupon 2014 notes at a yield of 4.71 percent, up from 4.04 percent at the previous auction.

Auction Yield

The yield at today’s Treasury auction compared with the average forecast of 0.314 percent in a Bloomberg News survey of nine primary dealers. Two-year note auction yields averaged 0.99 percent from the start of 2009 until the announcement of Greece’s first bailout in May 2010.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.62, versus an average of 3.71 for the past 10 offerings.

Indirect bidders, an investor class that includes foreign central banks, purchased 31.7 percent of the note, compared with an average of 34 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 7.9 percent, versus an average of 11.8 percent for the past 10 auctions.

Primary Dealers

Primary dealers, which are obliged to bid in Treasury sales, purchased 60.4 percent of the securities, the most since December. The average for the past 10 auctions is 54.2 percent.

The Treasury is selling $99 billion in notes and bonds this week. It will auction $35 billion in five-year debt tomorrow and $29 billion in seven-year securities on June 28.

This week’s note sales, combined with the June 21 auction of $7 billion in 30-year Treasury Inflation Protected Securities, will raise $49.9 billion of new cash, as maturing securities held by the public total $56.1 billion.

Two-year notes have returned 0.03 percent this year, compared with a 1.92 percent gain for Treasuries overall, according to Bank of America Merrill Lynch indexes. The two-year securities returned 1.46 percent in 2011, while Treasuries overall gained 9.79 percent.

Treasuries investors increased their neutral position in the securities and became “net short” for the third time in four weeks, according to a survey by the primary dealer JPMorgan Chase & Co.

Neutrals rose to 74 percent, from 66 percent, marking the highest level of outright neutrals since October. The proportion of net shorts, or bets the securities would fall compared with those on an advance, rose to 4 percentage points from zero in the week ending yesterday, even as the percent of outright shorts dropped to 15 percent from 17 percent. The percent of outright longs also dropped to 11 percent from 17 percent in the same period.

The Federal Reserve bought $4.65 billion of Treasuries today due from August 2020 to May 2022 as part of its Operation Twist program to replace short-term debt in its portfolio with longer-term securities to hold down borrowing costs.

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

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


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