Bloomberg News

Treasuries Rise 8th Day in Longest Rally in Four Years

September 26, 2012

Treasuries rose for an eighth day, the longest run of gains in almost four years, as investors seeking a refuge from Europe’s sovereign-debt crisis bolstered demand at the U.S. auction of $35 billion in five-year notes.

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 3.06, versus an average of 2.92 at the past 10 sales and the highest since April. Ten- year notes rallied earlier as Spanish debt yields climbed toward levels that prompted other European nations to seek bailouts. The U.S. will sell $29 billion in seven-year notes tomorrow.

“It was a good auction,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, which as one of the Federal Reserve’s 21 primary dealer is obliged to bid in U.S. debt offerings. “It is suggesting more and more fear -- that things could spiral out of control in Europe. The demand for dollars and Treasuries continues to rise.”

The yield on the current five-year note fell four basis points, or 0.04 percentage point, to 0.61 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices.

The benchmark 10-year note yield dropped six basis points to 1.61 percent. The price of the 1.625 percent security maturing in August 2022 increased 1/2, or $5 per $1,000 face amount, to 100 1/8.

The eight-day advance in 10-year prices is the longest since December 2008, when the economy was deteriorating as the financial crisis worsened. The gains have pared the benchmark note’s loss for September to 0.6 percent, according to Bank of American Merrill Lynch indexes.

Bond Yields

Thirty-year bond yields slid seven basis points to 2.78 percent, the lowest level since Sept. 7. It was their eighth straight daily drop, also the longest since December 2008.

Treasury volume reported today by ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $300 billion, down from $303 billion yesterday. Daily volume has averaged $241 billion in 2012. It touched $464 billion Sept. 13.

Spanish 10-year bonds slumped, pushing yields up the most in almost two months, after Catalan President Artur Mas called early elections yesterday. Spanish President Mariano Rajoy rejected his demand for increased control of the region’s revenue. Demonstrators clashed with police in Madrid, while Greeks protesting austerity staged a general strike.

“It’s the chaos in Europe,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “There’s still concern about the global economy. Those things together may have helped to bid Treasuries up. It’s the crisis that won’t go away.”

More Expensive

Treasuries were the most expensive in two months. The 10- year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.97 percent, the most costly since July 25. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The 2012 average is negative 0.74 percent.

Today’s five-year note sale drew a yield of 0.647 percent, compared with an average forecast of 0.664 percent in a Bloomberg News survey of nine primary dealers. The record low auction yield on the securities is 0.584 percent, set at the July offering.

“Supply really hasn’t been a problem for people,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “Things are heating up again in Europe.”

Indirect Bidders

Indirect bidders, an investor class that includes foreign central banks, bought 42 percent of the n at today’s sale, compared with an average of 43.1 percent at the past 10 offerings. Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 10.7 percent, versus a 10.1 percent average at the last 10 auctions.

Primary dealers bought 47.2 percent of the notes, the least since the April offering.

Today’s auction was the second of three note sales this week totaling $99 billion. The U.S. sold $35 billion in two-year securities yesterday at a yield of 0.273 percent.

The drop in Spain’s 10-year bond sent the yield up as much as 32 basis points, the most since Aug. 2, to 6.07 percent. It touched a five-month low of 5.55 percent on Sept. 10. Italy’s 10-year yield rose 11 basis points to 5.21 percent, moving higher for the fifth straight day.

German and British government securities rose as investors sought safety, sending yields lower. The yield on 10-year German bunds dropped 13 basis points to 1.46 percent, and 10-year U.K. gilt yields decreased 13 basis points to 1.69 percent.

Inflation Outlook

Benchmark U.S. 10-year note yields dropped to the lowest level in more than two weeks as gauges of inflation expectations receded from the highs reached after the Fed announced a third round of debt purchases, or quantitative easing, on Sept. 13. The yields touched 1.61 percent, the least since Sept. 7, falling below their 100- and 50-day moving averages of 1.64 percent.

The five-year, five-year forward break-even rate, a measure of the inflation outlook the Fed uses to help guide monetary policy, was 2.74 percent. It has fallen from 2.88 percent on Sept. 14, which was the most in 13 months. The 10-year average is 2.75 percent.

The 10-year note yield has formed a double-top chart pattern, suggesting the rally has further to run, CRT Capital Group LLC said. The yield is poised to fall to 1.5 percent, and possibly to the all-time low of 1.38, after it failed to rise above 1.89 percent on Sept. 14, a level that represents the second leg of the pattern and suggests selling momentum stalled, said Ian Lyngen, a CRT government-bond strategist in Stamford, Connecticut. A double top occurs when a security makes two consecutive peaks of about the same depth.

Mortgage Securities

The Federal Open Market Committee said after its September meeting the central bank will buy mortgage-backed securities at a pace of $40 billion per month until the labor market improves.

A measure of relative yields on mortgage securities that guide U.S. home-loan rates was near a record low amid bets the Fed will find a shortage of the bonds as it expands purchases. A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value was 58 basis points higher than an average of five- and 10-year Treasury rates. The record, 55 basis points, was reached yesterday.

“To get yields, investors are forced to take on credit risk,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “The unlimited QE has caused yields to fall and mortgages to outperform. Investors are just desperate for yields.”

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

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

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