Treasury Two-Year Yield Drops to Record Low on Plunge in Housing Market
Treasuries remained higher as the government sold $37 billion of two-year securities, the second of four note and bond auctions this week totaling $109 billion.
The auction drew a record low yield of 0.498 percent, compared with the 0.499 percent forecast in a Bloomberg News survey of 7 of the Federal Reserve’s 18 primary dealers. The sale’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.12, compared with an average of 3.19 at the past 10 auctions. The two-year note yield dropped to an all-time low earlier after a report showed sales of existing homes tumbled in July.
“The market is being driven by fear,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, before the auction. “The market is saying that they think there’s a high probability of a double-dip recession. They will hide in Treasuries until there’s more clarity on the economy.”
Current two-year note yields were little changed at 0.483 percent at 1:05 p.m. in New York, according to BGCantor Market Data. The 10-year note yield dropped 8 basis points, or 0.08 percentage point, to 2.52 percent after touching 2.4668 percent, the lowest level since March 2009.
At today’s government debt sale, indirect bidders, an investor class that includes foreign central banks, purchased 29.2 percent of the notes, compared with 32.8 percent at the last auction on July 27 and an average of 39.7 percent at the past 10 sales. Two-year notes drew a then-record yield of 0.665 percent at last month’s auction.
Direct Bidders
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 12.1 percent, compared with 13.5 percent in July and an average of 15.5 percent at the past 10 auctions.
The size of the two-year offering today was the smallest since November 2008. The Treasury will auction $36 billion in five-year notes tomorrow and $29 billion in seven-year debt on Aug. 26. This week’s total is the lowest since May 2009.
Sales of existing homes in the U.S. dropped 27.2 percent in July after a revised 7.1 percent decline in the previous month, the National Association of Realtors reported. The median forecast of 74 economists in a Bloomberg News survey was for a 13.4 percent drop.
“Risk aversion is back in force,” William O’Donnell, managing director at Royal Bank of Scotland Plc in Stamford, Connecticut, and the analyst John Briggs wrote in a research note to clients today. “Our bias continues to be for a flatter curve.”
Economic Growth
The yen appreciated as much as 1.8 percent to 83.60 per dollar, the strongest level since June 1995, as investors sought refuge. The Standard & Poor’s 500 Index fell 1.2 percent.
The extra yield investors demand to hold 30-year bonds over two-year notes narrowed to about 3.11 percentage points, the lowest level since October 2009.
The U.S. economy grew at a 1.4 percent annual rate in the second quarter, which would be the slowest pace since the recovery began in the middle of last year, a Commerce Department update on Aug. 27 is forecast by analysts to show. A 2.4 percent rate was calculated last month.
Fed Chairman Ben S. Bernanke will discuss the outlook for the economy on Aug. 27 at a conference in Jackson Hole, Wyoming. Following its Aug. 10 policy meeting, the central bank set a floor on its securities holdings and said growth would be “more modest in the near term than had been anticipated.”
Yesterday’s sale of 30-year Treasury Inflation Protected Securities, or TIPS, drew a yield of 1.768 percent, the lowest ever for sales of the debt dating to 1998. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of bonds offered, was a record high 2.78.
The Fed will purchase about $18 billion of U.S. debt by the middle of September using the money from principal payments on its holdings of agency debt and agency mortgage-backed securities. The central bank bought $1.35 billion of Treasuries today, increasing the total since the Fed began the program on Aug. 17 to $7.51 billion.
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
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