Treasuries Tumble After U.S. Auction of $13 Billion of 30-Year Securities

Treasuries fell, pushing 30-year bond yields to a four-week high, as a U.S. sale of $13 billion of the securities drew lower-than-average demand amid bets the Federal Reserve may buy shorter-term notes to spur the economy.

The bonds drew a yield of 3.852 percent, higher than the average forecast of 3.831 percent in a Bloomberg News survey of 6 of the Fed’s 18 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.49, the lowest since February. Inflation expectations rose to five-month highs before a speech tomorrow by Fed Chairman Ben S. Bernanke.

“It’s a concern about when quantitative easing comes, they’re going to buy 10-years on in, and they’re not going to buy 30-years,” said Jeff Given, part of a group that manages $18 billion of bonds at MFC Global Investment LLC in Boston. “So there’s a lack of sponsorship out there because of that.”

The yield on the 30-year bond increased nine basis points, or 0.09 percentage point, to 3.91 percent at 4:43 p.m. in New York, according to BGCantor Market Data. It reached 3.92 percent, the highest level since Sept. 17. The 3.875 percent security due in August 2040 dropped 1 19/32, or $15.94 per $1,000 face amount, to 99 10/32.

The 10-year note yield rose eight basis points to 2.5 percent and touched 2.51 percent, the highest since Oct. 4.

The auction, the final of three offerings of notes and bonds this week totaling $66 billion, was the second reopening of the $16 billion 30-year sale on Aug. 12. The securities drew yields of 3.954 percent in August and 3.82 percent in September.

‘Unattractive Auction’

“The 30-year was always set to be an unattractive auction, but the degree of sloppiness remains a surprise to many,” Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients.

Indirect bidders, a class of investors that includes foreign central banks, bought 32.4 percent of the securities today, compared with 36.1 percent at the September auction and an average for the past 10 sales of 35.8 percent. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 9.1 percent, versus a 17.6 percent average for the past 10 offerings. The average bid-to- cover ratio for the past 10 auctions was 2.7.

Long-bond yields rose on each of the past four trading days on concern a resumption of debt purchases by the Fed to stimulate the economy, a strategy known as quantitative easing, would concentrate on securities maturing in 5 to 10 years.

‘Unintended Consequences’

“Expectation of QE is already built into the market,” said Andy Richman, who oversees $10 billion as a strategist in Palm Beach, Florida, for SunTrust Bank’s private wealth management division. “Some are worried about inflation without growth as well. Inflation is not a big concern, but it’s one of the unintended consequences of continuing zero interest rates, QE 1 and also QE 2.”

Bernanke is scheduled to speak on monetary policy objectives and tools tomorrow at a conference in Boston.

“Some expect the chairman to lay out the potential framework for QE2,” Michael Cloherty, head of U.S. rates strategy for fixed income and currencies at primary dealer Royal Bank of Canada in New York, wrote in a note to clients. “There is also speculation that Bernanke will speak to potential inflation targeting.”

Boston Fed President Eric Rosengren said today that additional purchases of Treasuries by the central bank may help reduce the unemployment rate, which was 9.6 percent last month. The Fed’s goal is “not to have further disinflation,” he said in an interview with CNBC.

Inflation Expectations

A government report tomorrow will show U.S. inflation was in check last month, economists said. Consumer prices rose 0.2 percent in September after a 0.3 percent gain the prior month, a Bloomberg News survey forecast.

The spread between yields on 10-year notes and Treasury Inflation Protected Securities, an indication of inflation expectations over the life of the securities, touched 2.18 percentage points, the widest since May 19. The five-year average is 2.10 percentage points. The so-called break-even rate for 30-year TIPS and comparable U.S. bonds reached 2.56 percentage points, also a five-month high.

The gap between yields on 10-year Treasuries and the year- over-year consumer price index, known as real yields, was 1.36 percentage points. It touched a 2010 high of 2.07 percentage points in July and a 0.86 percentage point low in January.

Treasuries fell yesterday after demand was weaker than average at a sale of 10-year notes that raised $21 billion. The bid-to-cover ratio was 2.99 versus an average of 3.1 for the past 10 sales. The offering drew a yield of 2.475 percent.

Reinvestment Program

Thirty-year bonds later erased losses after the Fed said it would purchase about $32 billion in U.S. debt over the next month, including securities maturing in 2040, in its program to reinvest proceeds from its holdings of mortgage bonds.

The U.S. auctioned $32 billion of three-year debt on Oct. 12 at a record-low yield of 0.569 percent.

The Treasury can continue to cut auctions of nominal coupons of less than 7 years’ maturity by $1 billion per month until the February quarterly refunding on anticipation that the U.S. budget deficit will narrow, according to primary dealer Goldman Sachs Group Inc. The firm lowered its forecast for the fiscal 2011 shortfall to $1.25 trillion, from $1.3 trillion.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@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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