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Treasuries fell after European Central Bank President Mario Draghi said the ECB was ready to do whatever it takes to preserve the euro, damping demand for the safest assets.
Longer maturities led losses as the yield at a $29 billion auction of seven-year Treasuries exceeded forecasts in the final of three note sales this week totaling $99 billion. The yields on Spanish debt dropped after climbing to euro-era records this week amid concern its banks’ and region’s debts will force it to seek a bailout.
“There is some hope that positive steps are being taken,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers obligated to bid in Treasury auctions. “The general rallying trend in Treasuries is still in place. Any selloffs should be met with pretty swift buying.”
The yield on the benchmark 10-year note rose four basis points, or 0.04 percentage point, to 1.44 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. The 1.75 percent note maturing in May 2022 fell 3/8, or $3.75 per $1,000 face amount, to 102 27/32. The yield dropped to a record 1.379 percent yesterday.
The yield on the current seven-year note rose four basis points to 0.94 percent.
Today’s record low auction yield of 0.954 percent compared with a forecast of 0.948 percent in a Bloomberg News survey of 10 of the Federal Reserve’s primary dealers. The previous auction low yield was 1.075 percent in June.
Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $222 billion, trading below the $240 billion average this year.
Volatility was little changed at 62.6 basis points, close to the lowest since May 10, according to Bank of America Merrill Lynch’s MOVE index. It dropped to a five-year low of 56.7 basis points on May 7, and has averaged 75.2 basis points this year, touching a 2012 high of 95.4 basis points on June 15. It reached a record high of 264.6 basis points in October 2008 as the financial crisis intensified. The index measures price swings based on options.
The euro jumped against the dollar by the most in almost a month, climbing as much as 1.4 percent, after Draghi’s comments earlier.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said during a speech in London today. “And believe me, it will be enough.”
Draghi’s comments came as Spanish policy makers called on the ECB to do more to fight a renewed bout of financial turmoil that pushed the yields on the country’s bonds to the highest level in the euro era this week. Yields on the Spanish government’s 10-year bonds declined to 6.93 percent today after climbing to a euro-era record of 7.75 percent yesterday.
“We’re waiting to see some real concrete measures from the ECB,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “We need firm action. It’s a buy-the-dip opportunity on Treasuries.”
At today’s auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.64, compared with an average of 2.83 for the previous 10 sales.
Indirect bidders, an investor class that includes foreign central banks, purchased 46.3 percent of the notes, the most since August, compared with an average of 39.7 percent for the past 10 sales.
“That’s consistent with ongoing demand triggered by lowered growth estimates for the balance of the year, both domestic and overseas,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. There’s also “the general level of uncertainty triggered by the broader European sovereign-credit issues.”
Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 7.1 percent of the notes, compared with an average of 14.1 percent at the last 10 auctions.
Seven-year notes have returned 4.5 percent this year, compared with a 3.2 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes. The seven- year securities returned 13.7 percent in 2011, while Treasuries overall gained 9.8 percent.
The government sold $35 billion of two-year notes on July 24 at a record low yield of 0.22 percent and the same amount of five-year notes yesterday at a yield of 0.584 percent, also a record.
A report tomorrow is forecast to show the U.S. economy probably expanded in the second quarter at the slowest pace in a year. Gross domestic product, the value of all goods and services the nation produced, rose at a 1.4 percent annual rate after a 1.9 percent gain in the prior quarter, according to the median forecast of 81 economists surveyed by Bloomberg News.
The Federal Open Market Committee next meets on July 31 and Aug. 1. While policy makers refrained from introducing a third round of asset purchases at their meeting last month, Fed Chairman Ben S. Bernanke indicated in two days of testimony in Washington ending July 18 that it’s an option. The benchmark rate has been in a range between zero and 0.25 percent since December 2008.
“The Fed will extend its forward guidance to ‘at least through late-2015’ on Aug. 1, rather than through ‘mid-2015,’’ Ethan Harris, co-head of global economics research, and Priya Misra, head of U.S. rates strategy at Bank of America Corp. in New York, wrote in a note to clients today.
The primary dealer also expects the Fed to announce on Sept. 13 a $600 billion program to purchase Treasuries and mortgage-backed securities, through another quantitative easing program, dubbed QE3, up from a previous forecast of $500 billion, they wrote.
About 65 percent of QE3 is priced in, much lower than before QE2 was announced, they wrote, noting that QE3 will be ‘‘much less effective’’ than the first two QE programs, both in terms of boosting risky assets and stimulating the economy.
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