Bloomberg News

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

July 25, 2012

Treasuries fell, snapping a three- day advance, as speculation that European policy makers will boost the firepower of their bailout fund damped demand before the U.S. sold $35 billion in five-year notes.

The securities drew an auction record yield amid lower- than-average demand. Ten-year yields earlier climbed from a record low after European Central Bank council member Ewald Nowotny said there are arguments in favor of granting the region’s rescue fund a banking license, giving it access to ECB lending. Yields on five-, seven- and 30-year Treasuries also touched all-time lows for a third straight day.

“There is middling hope that European policy makers are making positive steps,” said Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York. “Still, the market continues to accept negative real returns as a result of the heightened anxiety about Europe and domestic growth, and as such demand continues.”

The yield on the current five-year note rose one basis point, or 0.01 percentage point, to 0.56 percent, at 2:45 p.m. in New York, according to Bloomberg Bond Trader Prices. The 0.75 percent note due in June 2017 fell 2/32, or 63 cents per $1,000 face amount, to 100 30/32. The yield on the benchmark 10-year note rose two basis points to 1.41 percent.

The five-year notes yielded an auction record 0.584 percent, compared with a forecast of 0.582 percent in a Bloomberg News survey of nine of the Federal Reserve’s 21 primary dealers. The previous low auction yield was 0.748 percent in May.

Bidder Participation

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.71, compared with an average of 2.96 for the previous 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 42.6 percent of the notes, compared with an average of 44.3 percent for the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 5.2 percent of the notes, the lowest since November 2009. The average at the last 10 auctions was 10.9 percent.

Five-year notes have returned 2.3 percent this year, compared with a 3.2 percent gain for the broader Treasury market, according to Bank of America Merrill Lynch indexes.

Today’s note offering was the second of three this week totaling $99 billion. The Treasury sold $35 billion in two-year debt yesterday at a record auction low yield of 0.220 percent, drawing almost record demand. It will sell $29 billion of seven- year bonds tomorrow.

‘Still Demand’

“Selling the auction at record yields reflects the fact that there is still demand for Treasuries given the domestic and international uncertainties that continue to persist,” said Scott Graham, head of government-bond trading in Chicago at Bank of Montreal (BMO)’s BMO Capital Markets unit, which as a primary dealer is required to bid on the securities. “Globally, we continue to look very cheap to the rest of the world of safe assets, despite the rally we’ve seen.”

Valuation measures show U.S. sovereign securities are close to the most costly levels ever. The term premium, a model created by economists at the Fed, dropped yesterday to negative 1.023 percent, the all-time most expensive. It was at negative 1.0 today. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Treasuries fell as the euro rose for the first time in six days today against the dollar and the yen after comments from the ECB’s Nowotny on a banking license for the European Stability Mechanism, or ESM.

‘Pro Arguments’

“There are pro arguments” for giving the ESM a banking license, Nowotny, who heads Austria’s central bank, said in an interview in his office in Vienna yesterday. “There are also other arguments, but I would see this as an ongoing discussion,” he said, adding he’s “not aware of specific discussions within the ECB at this point.”

Granting a banking license to Europe’s permanent bailout fund would give it access to ECB lending, easing concerns that the ESM’s 500 billion-euro ($607 billion) cash reserves won’t be enough if Spain or Italy require aid.

Investors in futures that track the Fed’s benchmark interest rate are betting that policy makers meeting next week will say they are prepared to keep rates unchanged until at least mid-2015.

The implied rates are below 0.5 percent for every maturity of fed funds futures traded on the Chicago Board of Trade, which lists contracts as far out as June 2015. The Fed has held the target rate for overnight loans at zero to 0.25 percent since December 2008 and pledged to keep it “exceptionally low” at least through late 2014.

“There are not enough Treasuries for the demand,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, a primary dealer. “There are so many concerns domestically and abroad that Treasuries remain well supported. There are a lot of issues on the horizon that are seeing very little improvement.”

To contact the reporters on this story: Cordell Eddings in New York at; Susanne Walker in New York at

To contact the editor responsible for this story: Dave Liedtka at

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