Bloomberg News

Treasuries Gain as Seven-Year Note Sale Draws Record Low Yield

June 28, 2012

Treasuries rose as demand for a refuge from Europe’s financial turmoil pushed yields to a record low at the U.S. government’s auction of $29 billion in seven- year notes for a third consecutive month.

Ten-year note yields dropped to the lowest in more than a week as European Union leaders began a debt-crisis summit. The seven-year note sale drew a yield of 1.075 percent, compared with the average forecast of 1.056 percent in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.64, the lowest since October.

“Clearly there are concerns about Europe, which set Treasuries on a positive path,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “Until we get clarifying headlines out of Europe that say otherwise, that trend will continue. We’ve seen no reason to sell off.”

The yield on the current seven-year note fell four basis points, or 0.04 percentage point, to 1.04 percent at 5:01 p.m. in New York, according to Bloomberg Bond Trader prices. They touched the lowest ever, 0.91 percent, in trading on June 1.

The benchmark 10-year note yield dropped four basis points to 1.58 percent and touched 1.57 percent, the lowest level since June 19. It reached a record low 1.44 percent on June 1.

Thirty-year bond yields trimmed gains as EU President Herman Van Rompuy said leaders have agreed to spend 120 billion euros ($149 billion) to stimulate growth and create jobs. He spoke at a press conference during the summit. The yields were down two basis points to 2.68 percent after falling earlier to 2.65 percent.

Bill Rates

The rate on the 30-day Treasury bill dropped to zero for the first time since March.

The last sale of seven-year debt, on May 24, drew a then- record low of 1.203 percent after a 1.347 percent yield at the April auction.

Indirect bidders, an investor class that includes foreign central banks, purchased 42 percent of the notes today, compared with an average of 40.6 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 6.5 percent, versus an average of 14.3 percent for the past 10 auctions.

The auction’s bid-to-cover ratio trailed the 2.84 average at the past 10 sales.

“It wasn’t particularly very good, but it hasn’t been the best week for the Treasury,” BTIG’s Greenhaus said. “Let’s not lose sight of the fact that yields are incredibly low.”

Below Average

The Treasury auctioned $99 billion in notes at three offerings this week, drawing lower-than-average demand at each. The bid-to-cover ratio at the $35 billion sale of five-year debt yesterday was 2.61, versus an average of 2.97 at the past 10 offerings. An auction of the same amount of two-year securities on June 26 had a ratio of 3.62, versus 3.95 at the May offering and an average 3.71 at the past 10.

The U.S. has sold $1.046 trillion in notes and bonds this year as President Barack Obama’s administration finances a fourth-straight deficit exceeding $1 trillion.

A valuation measure showed 10-year notes trading at almost the most expensive level ever. The term premium, a model created by economists at the Fed, was at negative 0.90 percent, after reaching a record negative 0.94 percent June 1 as investors sought refuge from Europe’s debt turmoil.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is 0.50 percent.

Treasuries have returned 3.2 percent this quarter, according to Bank of America Merrill Lynch data, amid concern Europe’s crisis is worsening. That’s the most since the third quarter of last year. They gained 9.8 percent in 2011.

Global Returns

U.S. government securities have returned 1.9 percent this year, compared with a 2.3 percent gain by global sovereign debt and a 4.9 percent advance by global corporate bonds, according to Bank of America Merrill Lynch indexes.

Ten-year notes extended a quarterly gain today as a report confirmed U.S. economic growth slowed in the first quarter and EU leaders met for the first day of their summit in Brussels.

Treasuries have swung between gains and losses for a week as investors waited for the summit. European leaders are struggling to reach an agreement on how to safeguard governments in Spain and Italy, with German Chancellor Angela Merkel rejecting calls to do more to cut their borrowing costs.

“The bar is very low, and no one expects anything to come out of the summit that will be enforceable or lasting,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “There’s no silver bullet. They’re in a situation where they have no answers.”

Operation Twist

The Fed sold $8.63 billion of Treasuries today due from November 2014 to June 2015 as part of its Operation Twist program to put downward pressure on interest rates and ease conditions in financial markets.

Operation Twist replaces short-term debt in the central bank’s holdings with longer-term Treasuries to extend the average maturity. Policy makers last week expanded the program to $667 billion and extended it to year-end.

U.S. gross domestic product expanded at a 1.9 percent annual pace last quarter, meeting the government’s previous estimate, Commerce Department data showed. Growth slowed from 3 percent in the last three months of last year.

Deflation Chances

Longer-term deflation probabilities increased slightly this week, according to the Fed Bank of Atlanta. Estimates derived from Treasury Inflation Protected Securities markets show the probability of deflation over five years starting in 2012 was 16 percent yesterday, versus 15 percent the week before, according to the bank’s Inflation Project. The chance for 2011-2016 remained at 14 percent.

A measure of price-increase predictions used by the central bank to set policy, the five-year, five-year forward break-even rate, which gauges average inflation between 2017 and 2022, declined to 2.48 percent on June 25, down from a 2012 high of 2.78 percent on March 19. It touched 3.23 percent in August.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net; Lindsey Rupp in New York at lrupp2@bloomberg.net

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


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