Bloomberg News

Treasuries Fall as 3-Year Yield Exceeds Forecast on Election Day

November 06, 2012

Nov. 6 (Bloomberg) --Treasury 10-year notes fell for the first time in three days as a U.S. sale of $32 billion of three- year debt drew lower-than-average demand while investors awaited the outcome of the presidential election.

Longer maturities led the decline as U.S. voters head to the polls to decide whether President Barack Obama or challenger Mitt Romney will face the job of avoiding the so-called fiscal cliff of $607 billion in spending cuts and tax increases scheduled to take effect in January. The yield at the note sale, the first of three auctions this week totaling $72 billion, exceeded dealers’ forecasts.

“There is a great deal of uncertainty associated with the election, and more importantly, the ramifications for the fiscal cliff,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The auction was pretty average.”

The benchmark 10-year yield climbed seven basis points, or 0.07 percentage point, to 1.75 percent at 5:03 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 fell 19/32, or $5.94 per $1,000 face amount, to 98 28/32.

The yield on the current three-year note rose four basis points to 0.41 percent.

Election Day

Obama led Romney 48 percent to 45 percent in an Oct. 31- Nov. 3 national poll conducted by the Pew Research Center, a survey that showed the candidates tied at 47 percent a week ago. The final tracking poll by ABC News and the Washington Post had Obama taking a lead of 50 percent to 47 percent in a survey of 2,345 likely voters conducted Nov. 1-4.

Returns on U.S. fixed-income assets have averaged 6.5 percent throughout Obama’s term, exceeding the 4.6 percent during the previous four years under George W. Bush, according to Bank of America Merrill Lynch indexes.

Ever since Lyndon B. Johnson defeated Barry Goldwater for the presidency in 1964, yields on 10-year Treasuries have dropped about 40 basis points in the first month when a Democrat wins, and risen 19 after a Republican victory, according to data compiled by Bloomberg.

Ten-year Treasury yields will rise to two percent if Romney wins versus a decline to 1.5 percent if Obama wins, according to Barclays Plc, a primary dealer.

Race Results

“If Obama wins, the initial reaction might still be some modest buying of fixed income, on the view that the Fed will be encouraged to proceed” with its bond-buying program, Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote in an e-mailed note. A Romney victory would result in a “broad sell-off” of fixed income, he said.

Credit swaps protecting the debt of the U.S. traded at 36.4 basis points as of 12:04 p.m. in New York, after rising the most since April 23 to 36.9 basis points yesterday, according to data provider CMA which is owned by McGraw Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The measure reached 29.5 basis points, the lowest level in four weeks, on Oct. 25. The contracts typically rise as investor confidence deteriorates and fall as it improves.

“The general tone of U.S. credit-default swap movement would suggest continued stalemate and contentious atmosphere in Washington,” said Adrian Miller, director of global market strategy at GMP Securities LLC in New York.

Auction Outcome

The three-year notes yielded 0.392 percent at the auction, compared with a forecast of 0.383 percent in a Bloomberg News survey of nine of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.41, the least since April and compared with an average of 3.59 for the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 25.1 percent of the notes, the lowest since May 2007 and compared with an average of 32.9 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 22.3 percent of the notes at the sale, the second most since January, 2010, compared with an average of 10.8 percent for the past 10 auctions.

The auction was “very average,” Brett Rose, an interest- rate strategist at Citigroup Inc. in New York wrote in a note to clients.

Sales Update

The Treasury is due to auction $24 billion of 10-year securities tomorrow and $16 billion of 30-year debt on Nov. 8. The sales will raise $8.9 billion of new cash as maturing securities held by the public total $63.1 billion, according to the Treasury.

Investors in Treasuries were the most neutral in more than two months as they cut bullish positions ahead of the closely contested U.S. presidential election, according to a survey by JPMorgan Chase & Co.

Investors raised neutral bets to 70 percent from 68 percent, pushing it to the highest level since Aug. 27, the survey reported.

The 10-year yield will be 1.73 percent at Dec. 31 and rise to 2.03 percent by the end of June, according to a Bloomberg survey of banks and securities companies with the most recent projections given the heaviest weightings.

Borrowing Totals

Even as Obama increased the U.S. publicly traded debt to a record $10.8 trillion as of August, investors have been willing to accept lower interest rates as the central bank buys bonds as a way to sustain the expansion and as inflation holds in check.

After purchasing $2.3 trillion of Treasuries and mortgage- related bonds, the Fed on Oct. 24 reiterated its plan to continue unprecedented stimulus measures by buying $40 billion of home-loan securities a month until the labor market improves “substantially.”

The Fed is swapping shorter-term Treasuries in its holdings with those due in six to 30 years as part of its efforts to support the U.S. economy by putting downward pressure on long- term borrowing costs. The central bank bought $4.85 billion of Treasuries maturing from November 2018 to August 2020 today, according to the Fed Bank of New York’s website.

The Fed-preferred measure of inflation expectations, the five-year, five-year forward break-even rate reached 2.88 percent Nov. 1, the highest since August 2011. The gauge projects the expected pace of consumer price increases during the five-year period beginning 2017.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net;

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


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