Bloomberg News

Treasuries Gain as Refuge Demand Boosts First Note Sale of Year

January 08, 2013

Treasuries rose for a third day as yields close to eight-month highs bolstered demand at the government’s first sale of notes this year and investors sought refuge amid concern corporate profits may show economic growth is less than forecast.

U.S. government-debt yields declined as an auction of $32 billion in three-year notes drew a yield of 0.385 percent, compared with a forecast of 0.387 percent in a Bloomberg News survey of five of the Federal Reserve’s 21 primary dealers. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased a record amount for the second straight auction. Stocks dropped before Alcoa Inc. (AA:US) started earnings-reporting season after the market closes.

“Equities are off and we seem to have found a bottom for now after such a massive selloff,” Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “These levels offer a decent buying opportunity, given the headwinds and uncertainty to come.”

The yield on the benchmark 10-year note fell three basis points, or 0.03 percentage point, to 1.87 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent security maturing in November 2022 rose 1/4 or $2.50 per $1,000 face value to 97 26/32.

The yield on the current three-year note fell two basis points to 0.37 percent. The record-low three-year auction yield of 0.327 percent was reached Dec. 11.

The Standard & Poor’s 500 Index declined for a second day, falling 0.3 percent after dropping as much as 0.7 percent.

Biggest Movers

The bond markets of Israel and the U.K. were the world’s biggest movers among developed sovereign-debt issuers today, according to Bloomberg’s Cumulative Movement Index, which measures changes in 10-year bonds, two-year/10-year yield differential and five-year credit-default swaps relative to the average daily change in the past 90 days.

Israeli bonds had a cumulative movement index of 5.2 and the U.K.’s one of 3.1. The U.S. was 12th, at 1.9.

At today’s three-year auction, the bid-to-cover ratio -- which gauges demand by comparing total bids with the amount of securities offered -- was 3.62, compared with an average of 3.57 for the past 10 auctions of the security.

Direct bidders purchased 26.4 percent of the notes at the sale, topping the previous mark of 24.8 percent set in December and the average of 14.2 percent for the past 10 auctions.

Indirect bidders, an investor class that includes foreign central banks, purchased 28.4 percent of the notes at today’s auction, compared with an average of 31 percent for the past 10 sales.

‘Auction Dynamics’

“The auction went very well,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., a primary dealer. The record direct bid “speaks to an underlying change in auction dynamics: that direct-bidder demand for short paper is fundamentally on the rise.”

The Fed concluded at year-end its Operation Twist program of selling shorter-term securities and purchasing longer-term government debt, thus reducing the available supply of shorter- term debt.

Treasuries are off to their worst start to a year since 2009, handing investors a 0.7 percent loss in 2013 as of yesterday, according to Bank of America Merrill Lynch indexes. They returned 2.16 percent last year. Ten-year yields rose 20 basis points last week.

‘Severe’ Selloff

“We had a selloff that was extremely severe,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut. “The market will gravitate to higher prices because of that. The bargain hunters are back in the marketplace. The auctions will go well all week.”

The Treasury is selling $66 billion in notes and bonds this week. It’s due to auction $21 billion of 10-year securities tomorrow and $13 billion of 30-year debt the next day. The sales will raise $24.4 billion of new cash, as maturing securities held by the public total $41.6 billion, according to the Treasury.

Primary dealers trade government securities with the central bank and are obliged to participate in Treasury sales.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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


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