Bloomberg News

Treasury Bonds Advance After Weak Auction Lures Buyers

October 11, 2012

Treasury 30-year bonds advanced for a third day as investors took advantage of a spike in yields after a weak $13 billion auction of the securities, underscoring the insatiable appeal of the world’s safest assets.

The longest-maturity U.S. security drew a yield of 2.904 percent, compared with a forecast of 2.880 percent in a Bloomberg News survey of eight of the Federal Reserve’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.49, versus an average of 2.65 for the previous 10 sales. Yields rose earlier as global stocks climbed for the first time this week and commodities rallied as investors sought higher returns after U.S. jobless claims slid to a four-year low.

“We saw too much of a concession and the investors are buying the rise in yields,” said Suvrat Prakash, an interest- rate strategist in New York at BNP Paribas SA, which as a primary dealer is required to bid at U.S. debt auctions. “People are still comfortable being long, given the global economic backdrop. We still have a lot of questions and uncertainty to wade through, which means less growth and less probability of a rate market selloff.”

The 30-year bond yield fell three basis points, or 0.03 percentage point, to 2.85 percent at 5 p.m. New York time, after rising to 2.93 percent. The 2.75 percent security due August 2042 rose 1/2, or $5 per $1,000 dollar face amount, to 97 30/32. Ten-year note yields were little changed at 1.67 percent.

‘Treading Water’

The Fed will buy as much as $2.25 billion of Treasuries maturing from February 2036 to August 2042 tomorrow, according to the Fed Bank of New York’s website. The central bank is in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term interest rates.

“There is still a lot of uncertainty, so it keeps the market from selling off significantly,” said Kevin Flanagan, the Purchase, New York-based chief fixed-income strategist at Morgan Stanley Smith Barney, the world’s largest brokerage, with assets of $1.78 trillion. “We’ve gotten to levels where the market feels skittish, and so we are just treading water.”

Today’s bond auction was the last of three sales of coupon- bearing securities by the Treasury this week totaling $66 billion. The U.S. sold $21 billion of 10-year debt yesterday at a yield of 1.7 percent and auctioned $32 billion of three-year notes on Sept. 11 at a yield of 0.346 percent.

Indirect bidders, an investor class that includes foreign central banks, purchased 26.5 percent of the bonds, the lowest since August 2011 and compared with 38.7 percent of the notes at the September sale and an average for the past 10 offerings of 33.2 percent.

Jobless Claims

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 14.2 percent of the bonds, compared with 12.4 percent of the notes at the last sale and an average of 15.1 percent for the past 10 auctions.

Thirty-year bonds have returned 2.5 percent this year, compared with a 2 percent gain in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes.

Applications for jobless benefits dropped 30,000 to 339,000 in the week ended Oct. 6, the fewest since February 2008, Labor Department figures showed today. Economists forecast 370,000 claims, according to the median estimate in a Bloomberg survey. One state accounted for most of the plunge in claims, a Labor Department spokesman said as the data were issued to the press.

Italy sold 3.75 billion euros ($4.8 billion) of its benchmark three-year bond to yield 2.86 percent, more than the 2.75 percent at the last auction of the same securities on Sept. 13. Investors bid for 1.67 times the amount offered, up from 1.49 times last month, indicating investors are still willing to invest in the country.

The MSCI All-Country World Index (MXWO) advanced as much as 0.8 percent, while the Standard & Poor’s GSCI gauge of raw materials added as much has 1.5 percent as corn and soybeans led gains.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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