Bloomberg News

U.S. 10-Year Yield Falls Most Since November on Italy’s Vote

February 25, 2013

Treasuries rose, pushing 10-year yields down the most since November, as polls indicated the euro area’s third-largest economy, Italy, may be left with a hung parliament, stoking refuge demand.

The benchmark yield reached a one-month low after the U.S. sale of $35 billion in two-year notes, with direct bidders, non- primary dealer investors that place their bids directly with the Treasury, purchasing the highest amount of the securities since October. U.S. debt gained as Italy may require another vote after the four-way race that ended today was poised to result in a divided parliament, spurring concern of renewed turmoil in European markets.

“The move today is all about the Italian elections, which is giving a bid to Treasuries,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “When there is concern about one of the largest economics in Europe with one of the largest debt loads in the region, you will see a flight to quality.”

The benchmark 10-year yield dropped 10 basis points, or 0.10 percentage point, to 1.86 percent at 5:02 p.m. New York time, according to Bloomberg Bond Trader prices. The yield fell the most since Nov. 7 and reached the lowest level since Jan. 25. The 2 percent note maturing in February 2023 added 7/8, or $8.75 per $1,000 face amount, to 101 7/32.

Thirty-year bonds rose more than two points, pushing the yield down 10 basis points to 3.05 percent, the least since Jan. 25.

Trading Levels

“A lot of people had a bearish outlook and a lot of stops have been hit,” said Larry Dyer, a U.S. interest rate strategist with HSBC Holdings Plc in New York, one of 21 primary dealers that trade with the Federal Reserve. “Most investors were looking for rates to increase at the start of the year, and that had them short the market, and now suddenly we’re back in risk off.” Stops are preset orders triggered when prices reach a certain level, while short positions are bets that an asset will decline in value.

The difference between 10-year yields on regular U.S. government securities and Treasury Inflation Protected Securities, known as the 10-year break-even rate, was 2.51 percentage points, the least since Jan. 25. It touched 2.73 percentage points on Sept. 17, the highest since 2006.

The two-year notes drew a yield of 0.257 percent, compared with a forecast of 0.258 percent in a Bloomberg News survey of seven 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 3.33, the least since July 2011 and compared with an average of 3.83 for the past 10 sales.

Bid Pattern

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 31.6 percent of the notes at the sale, compared with an average of 18.84 percent for the past 10 auctions.

Indirect bidders, an investor class that includes foreign central banks, purchased 22 percent of the notes, compared with an average of 28.13 percent for the past 10 sales.

“With the level of interest rates, there are fewer reasons to be involved in those securities,” said Thomas di Galoma, a managing director at Navigate Advisors, a brokerage for institutional investors in Stamford, Connecticut. “If one was to look at better value on the curve you’d probably opt for longer dated maturities.”

Two-year notes have returned gained 0.03 percent this year, after returning 0.28 percent last year, according to Bank of America Merrill Lynch indexes.

Auction Reading

“The auction, overall, fit in with the recent 2-year note auctions,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., a primary dealer. “The bid- to-cover ratio was sort of low. But when you consider the fact that the auction sold at the yield it did and we have a strong buy-side bid, it still was positive.”

The Treasury is selling $99 billion in notes and bonds this week. It’s due to auction $35 billion of 5-year securities tomorrow and $29 billion of 7-year debt on Feb. 27.

Treasuries rallied as preliminary results from Italian elections show former Prime Minister Silvio Berlusconi may have built a blocking minority in the Senate to deny outright victory to opponent Pier Luigi Bersani. Italy’s 10-year yield rose four basis points, or 0.04 percentage point, to 4.49 percent, after falling as much as 28 basis points, the most since Aug. 3.

Fed Chairman Ben S. Bernanke testifies before lawmakers tomorrow and the following day. Bernanke’s two-day testimony begins tomorrow at 10 a.m. in the Senate and continues Feb. 27 in the House.

Fed Policy

The Fed is purchasing $85 billion of Treasuries and mortgage-backed securities a month, a policy known as quantitative easing, or QE. Bernanke and his colleagues on the Federal Open Market Committee have pledged to continue buying bonds until the labor market improves “substantially.” Unemployment was 7.9 percent in January.

“There has been a lot ink spilled on this, but it’s worth remembering that even if the Fed stops QE at the end of this year, that’s still $1 trillion worth of balance-sheet growth,” said Michael Cloherty, head of U.S. interest rate strategist at Royal Bank of Canada’s RBC Capital Markets unit in New York, on Bloomberg Radio’s “Surveillance” with Tom Keene, Sara Eisen and Michael McKee. “It’s not exactly going easily into the night.”

The central bank bought $3.3 billion Treasuries maturing from May 2020 to February 2023.

Treasury 10-year yields will fall to 1.85 percent by the end of March and then climb to 2.30 percent by Dec. 31, based on a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

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

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


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