Bloomberg News

Treasuries Drop Before U.S. Auctions Two-Year Securities

July 24, 2012

Treasuries declined, with yields rising from record lows, before the government auctions $35 billion in two-year notes in the first of three auctions this week totaling $99 billion.

Ten-year yields increased from almost a record low amid speculation Europe’s financial crisis is spreading to the region’s strongest nations. The securities outperformed equivalent German bunds, with the difference in yield between them the least in two weeks, after Moody’s Investors Service cut the Aaa-rated nation’s outlook yesterday, citing “rising uncertainty” over the region’s debt crisis. The U.S. Treasury plans to sell five-year notes tomorrow and seven-year debt the next day.

“The market has to back up to find some true value,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “It is readjusting. There’s still enough flight-to-quality that will handle the two- and five-year notes. The seven-year trades cheap on the curve.”

Ten-year Treasury yields rose two basis points, or 0.02 percentage point, to 1.45 percent as of 9:41 a.m. in New York, according to Bloomberg Bond Trader data. The 1.75 percent security due in May 2022 fell 7/32, or $2.19 per $1,000 face amount, to 102 23/32. The yield declined yesterday to a record low 1.3960 percent.

Bunds fell, pushing 10-year yields up eight basis points to 1.25 percent. The yield difference, or spread, between the German and U.S. debt narrowed to 20 basis points, the least on a closing basis since July 10.

Treasury Auctions

Two-year notes yielded 0.219 percent in pre-auction trading, versus 0.313 percent the last time they were sold on June 26. The auction record low was 0.222 percent in August 2011. Investors submitted orders for 3.62 times the amount of available debt last month. The average over for the past 10 sales is 3.72.

Direct bidders, non-primary dealers buying for their own accounts, purchased 7.9 percent of the securities. Indirect bidders, which include foreign central banks, bought 31.7 percent of the debt, the least since December.

The Treasury Department is selling $35 billion of five-year debt tomorrow and $29 billion of seven-year securities in two days.

Demand for Treasuries drove yields on U.S. five-, 10- and 30-year debt to record lows yesterday.

U.S. government securities returned 1.3 percent this month through yesterday, including reinvested interest, according to Bank of America Merrill Lynch indexes. German debt returned 2.5 percent, the indexes showed, while the MSCI All-Country World Index of stocks dropped 2 percent in the period on a similar total return basis.

Euro Risks

Moody’s cited risks that Greece may leave the 17-nation currency bloc. It also cited the “increasing likelihood” of collective support for European countries such as Spain and Italy for yesterday’s changes to the outlook for Germany, along with those for the Netherlands and Luxembourg.

Spain’s bonds slid, pushing the 10-year yield to 7.63 percent and the five-year rate to 7.56 percent, both euro- lifetime highs. The nation’s borrowing costs rose at an auction of 3.05 billion euros ($3.69 billion) of bills. Spain’s government hasn’t ruled out leaving the euro as it considers options including an international bailout, El Confidencial reported, citing people close to Prime Minister Mariano Rajoy.

Quantitative Easing

The Federal Reserve plans to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today as part of a program known as Operation Twist. The central bank is swapping short-term Treasuries in its holdings for longer maturities in a bid to send borrowing costs lower and stimulate the economy.

Fed Governor Sarah Bloom Raskin said yesterday U.S. policy makers will debate at a meeting next week whether to start another program to spur growth through large-scale Fed purchases of bonds.

The central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, seeking to cap borrowing costs.

Sales of new homes may have risen to a 371,000 annual pace in June, the most since April 2010, according to economist forecasts in a Bloomberg News survey before figures from the Commerce Department tomorrow.

While U.S. economic growth is limited, it would be an “overreaction” to suggest it is headed for a recession, according to Bob Doll, who serves as an adviser to BlackRock Inc. (BLK:US), the world’s biggest money manager, which oversees about $3.6 trillion. Doll, who was the company’s former chief equity strategist for fundamental equities, commented yesterday on BlackRock’s website.

To contact the reporters on this story: Susanne Walker in New York at; Anchalee Worrachate in London at

To contact the editor responsible for this story: Robert Burgess at

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