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Treasuries Rally After Three-Year Auction on Renewed European Debt Concern
Treasuries gained after the government’s $33 billion three-year note auction drew a record low yield as investors renewed concern that Europe’s sovereign- debt crisis will undermine the global economic recovery.
The yield on the 10-year note fell from the highest level in almost a month as stocks dropped. The difference between 10- year German bond yields and those of Irish and Portuguese debt climbed to all-time highs, while the German-Greek yield spread increased to the widest since May.
“The fall-out in euro sovereign debt certainly played into the flight-to-safety bid,” said Thomas L. di Galoma, head of U.S. rates trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors. “It was a very good auction. Even though three-year notes are not cheap, it’s part of the mentality to buy safety.”
The yield on the benchmark 10-year note slid 10 basis points, or 0.10 percentage point, to 2.60 percent at 4 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 rose 27/32, or $8.44 per $1,000 face amount, to 100 6/32.
The extra yield investors demand to hold 10-year notes over 2-year debt fell for the first time in five days on concern the global economy may be stalling. The spread decreased to 2.13 percentage points after rising last week to 2.25 percentage points, the widest on an intraday basis since Aug. 11.
Two-Year Note
A two-point gain in the 30-year bond pushed the yield down 12 basis points to 3.67 percent. The two-year note yield decreased 3 basis points to 0.49 percent after touching the all- time low of 0.4542 percent on Aug. 24. The current three-year note yield dropped 5 basis points to 0.73 percent.
The Standard & Poor’s 500 Index lost 1.2 percent after a four-session rally. Crude oil for October delivery dropped 1.2 percent to $73.71 a barrel. The dollar tumbled to a 15-year low of 83.52 yen.
The 10-year note yield increased on Sept. 3 to 2.76 percent, the highest level since the Fed’s meeting on Aug. 10, after the government’s payrolls report showed companies in the U.S. added more jobs last month than economists forecast. The yield climbed 23 basis points Sept. 1-3 for the biggest three- day gain since the period that ended Dec. 22.
At today’s three-year note auction, the securities drew a record-low yield of 0.790 percent, compared with the 0.791 percent average forecast in a Bloomberg News survey of 7 of the 18 primary dealers obligated to participate in government sales. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.21, compared with an average of 3.14 for the previous 10 sales.
Indirect Bidders
Indirect bidders, an investor class that includes foreign central banks, purchased 42.4 percent of the securities, the biggest share since June. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11.7 percent, compared with 15.8 percent of the securities at the prior sale.
“The three-year auction was very strong,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, a primary dealer. “The front end of the curve is like watching paint dry. The Fed isn’t going anywhere for years, the market knows it and that’s what the bid for the auction tells us.”
The sale was the first of three note and bond auctions this week totaling $67 billion, the smallest combination of the maturities since July 2009. The government will sell $21 billion of 10-year debt tomorrow and $13 billion of 30-year bonds on Sept. 9.
Obama’s Proposal
President Barack Obama proposed yesterday spending at least $50 billion to rehabilitate the nation’s transportation infrastructure and add jobs. His administration has increased U.S. publicly traded debt to a record $8.18 trillion to support the economic recovery.
Treasuries rose earlier after the Wall Street Journal reported that Europe’s recent stress tests of major banks understated some lenders’ holdings of risky government debt. Germany’s 10 biggest lenders, including Deutsche Bank AG and Commerzbank AG, may need about 105 billion euros ($135 billion) in fresh capital under regulations that may be proposed this week, the Association of German Banks said yesterday.
Treasuries rallied on Aug. 10, when the Fed said at the conclusion of its policy meeting that it would keep its bond holdings level by resuming the purchase of U.S. debt to support an economic recovery it described as weaker than earlier anticipated. The central bank has held its target lending rate at zero to 0.25 percent since December 2008.
Outlook for Yields
The yield on 10-year U.S. and German government bonds may drop to 2 percent, according to Standard Bank Plc.
“Ten-year U.S. yields could still reach 2 percent, while this yield level looks very achievable indeed for 10-year German bunds,” Steve Barrow, head of Group of 10 foreign-exchange research at the firm in London, wrote today in a report.
The yield on the bund fell 7 basis points to 2.26 percent. It slid on Aug. 31 to 2.087 percent, the all-time low. The German-Irish 10-year yield spread was as wide as 380 basis points, the most since Bloomberg started compiling the data. The Portuguese-German spread reached 356 basis points, also a record. The Greek-German yield spread touched 948 basis points.
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
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