Treasuries Rise After Three-Year Auction on Renewed European Bank Concern
Sept. 7 (Bloomberg) -- James Caron, global head of interest-rate strategy at Morgan Stanley, talks with Bloomberg's Mark Crumpton about the U.S. bond market. (Source: Bloomberg)
Treasuries rose 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 almost the highest level in almost a month as investors sought safety. 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. “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 8 basis points, or 0.08 percentage point, to 2.62 percent at 2:33 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 rose 22/32, or $6.88 per $1,000 face amount, to 100 1/32.
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 4 basis points to 0.75 percent.
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.
Stress Tests
Europe’s recent stress tests of major banks understated some lenders’ holdings of risky government debt, said the Wall Street Journal, citing its own analysis. Some European banks excluded certain nations’ debt from their totals, while others reduced amounts to account for short positions, according to a report published on the newspaper’s website. The European Union tested 91 lenders in July, giving 84 of them passing grades. A short is a bet the price of a security will decline.
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.
At today’s U.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 sale was the first of three note and bond auctions this week totaling $67 billion. The government will sell $21 billion of 10-year debt tomorrow and $13 billion of 30-year bonds on Sept. 9.
President Barack Obama proposed yesterday spending at least $50 billion to rehabilitate the nation’s transportation infrastructure to help spur an economy that has lost jobs for three straight months. Obama has increased U.S. publicly traded debt to a record $8.18 trillion to encourage the recovery.
U.S. Payrolls
The 10-year note yield increased on Sept. 3 to 2.76 percent, the highest level since the Federal Reserve’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 on Sept. 1-3 for the biggest three-day gain since the period that ended Dec. 22.
U.S. debt yields tumbled 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 10-year note yield will advance to 3.10 percent in the fourth quarter, according to the median forecast of 73 analysts in a Bloomberg News survey. The two-year note yield is expected to advance to 0.75 percent.
Treasuries that protect against rising consumer prices, the difference between short- and long-term interest rates and real yields show investors anticipate a 28 percent chance of deflation, according to Barclays Plc. That’s down from 70 percent in the aftermath of the collapse of Lehman Brothers Holdings Inc. in 2008.
“There is more than a fair share of bearishness on the economy priced into the market,” said James Sarni, senior managing partner in Los Angeles at Payden & Rygel, which oversees $50 billion. “The fact is we are seeing growth, though slowly, and people are spending money slowly. Policy makers have shown they are willing to do a lot to spur growth.”
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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