Bloomberg News

Treasuries Rise on Auction Demand, Amid Europe Debt Crsis

July 10, 2012

Treasury 10-year note yields approached a record low as concern Europe’s financial woes are weighing on U.S. growth led to higher-than-average demand at the government’s auction of $32 billion in three-year notes.

Yields on the benchmark security for everything from mortgages to corporate loans dropped below 1.5 percent for the first time in a month. The three-year notes drew a bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, of 3.52, compared with an average of 3.45 for the past 10 sales. Tomorrow’s 10-year note auction yield would be a record based on when-issued trading.

“We are seeing a capital-preservation trade where people just want safe quality assets on their books, and are hunkering down in fear until something changes,” said Scott Graham, head of government-bond trading in Chicago at Bank of Montreal (BMO)’s BMO Capital Markets unit, one of the 21 primary dealers required to bid on the securities. “Europe continues to creep toward the verge of complete mayhem and panic, with no end in sight. With that outlook, things have to get worse before they get better.”

The yield on the 10-year note fell one basis point, or 0.01 percentage point, to 1.50 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 1.4964 percent, the first time under 1.5 percent since June 4, after reaching an all-time low of 1.44 percent on June 1. The 1.75 percent note due in May 2022 rose 2/32, or 63 cents per $1,000 face amount, to 102 1/4.

The 30-year bond yield fell two basis points to 2.60 percent. The yield on the current three-year note was little changed at 0.35 percent.

Three-Year Auction

The three-year securities sold today, which mature in July 2015, drew a yield of 0.366 percent, compared with the average forecast of 0.367 in a Bloomberg News survey of seven of the Fed’s primary dealers.

Indirect bidders, an investor class that includes foreign central banks, purchased 30 percent of the notes, compared with an average of 35.5 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 10.2 percent of the notes at the sale, compared with an average of 9.9 percent for the past 10 auctions.

Primary dealer net outright position in U.S. government securities due in three years or less before the auction was $61.5 billion, down from a high of $73.2 billion in June, according to Federal Reserve data. The average over the past year is $34.5 billion.

‘Decent Demand’

“The auction came and went and saw decent demand, as 36 basis points is meaningful in a world with diminishing safe assets -- and increasingly negative yields on the ones that are safe,” BMO’s Graham said.

The Treasury is selling $66 billion in notes and bonds this week. The government will sell $21 billion in 10-year debt tomorrow and $13 billion in 30-year securities on July 12. Ten- year notes yielded 1.51 percent in pre-auction trading, which would be a record low yield at a Treasury sale. The securities were auctioned at a record low 1.622 percent at the June 13 sale.

Three-year notes have returned 0.3 percent this year, compared with a 2.5 percent gain for Treasuries overall, according to Bank of America Merrill Lynch indexes. The three- year securities returned 3.4 percent in 2011, while Treasuries overall gained 9.8 percent.

A butterfly-chart spread indicates the Treasury three-year note may outperform two- and five-year securities as it approaches the cheapest level since May 2009 before the Federal Open Market Committee meets next week.

Quantitative Easing

The index spread, which measures how the three-year note is performing against the other two securities, is about negative 18 basis points, the cheapest level since May 2009. An advance toward positive figures indicates investors are more bearish on the middle of the three securities, making it relatively cheap versus the others.

“The market remains unconvinced Europe is progressing in a comprehensive and timely fashion,” wrote Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York, in a note to clients. “The likelihood of the Fed unveiling QE3 continues to increase with each passing soft data point.”

The Fed has purchased $2.3 billion of mortgage and Treasury debt in two separate rounds of asset purchases intended to stimulate the economy, known as quantitative easing. While policy makers refrained from introducing a third round of purchases last month, Chairman Ben S. Bernanke indicated it remains an option.

Spanish Banks

Yields on benchmark 10-year notes declined today after Bank of England Governor Mervyn King’s comments that the U.K. economy doesn’t show “great signs” of recovering from recession underscored the refuge aspect of U.S. securities.

Spanish bond yields fell below 7 percent after euro-region finance chiefs meeting in Brussels agreed to make available 30 billion euros ($37 billion) by the end of this month to shore up Spain’s banks. The aim is to eventually use the region’s bailout money to recapitalize banks directly instead of weighing the government with the debts.

European governments will provide as much as 100 billion euros in emergency loans to Spain’s banks and may move the costs off the balance sheet of the government in Madrid to shield the euro region’s fourth-largest economy.

“It’s amazing what’s going on with Treasuries and it’s all being fueled by the flight to quality from Europe,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “Unless there’s a real rally that causes yields to fall to levels that people are uncomfortable with, the auctions should go well.”

To contact the reporters on this story: Cordell Eddings in New York at ceddings@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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