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Treasuries Fall Before 10-Year Note Sale as Demand Wanes for Safest Debt

Treasuries declined before a U.S. government sale of $21 billion in 10-year notes amid speculation European officials are stepping up efforts to solve the region’s debt crisis, damping demand for the safety of U.S. debt.

Treasury 10-year note yields rose in the first two-day increase in almost three weeks amid reports that European governments are considering aid for Portugal as it faces sovereign debt challenges. Portugal’s borrowing costs fell and demand rose at a sale of 10-year bonds. The U.S. will sell $13 billion of 30-year bonds tomorrow, the last of three auctions this week totaling $66 billion.

“We’ve had a better tone from the European peripherals doing better,” said Thomas Roth, senior Treasury trader in New York at Bank of Tokyo-Mitsubishi UFJ Ltd. “There’s a flight from quality. Guys are trying to set up shorts ahead of the supply and hope to underwrite it at cheaper levels.”

The yield on the 10-year note rose seven basis points to 3.41 percent as of 11:29 a.m. in New York, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 fell 18/32, or $5.63 per $1,000 face value, to 93 15/32.

The 10-year U.S. securities scheduled for sale today yielded 3.42 percent in pre-auction trading, compared with 3.34 percent the last time the notes were sold on Dec. 8.

A yield of “3.40 percent on the 10-year is where attention perks up,” Jim Vogel, head of agency-debt research at FTN in Memphis, Tennessee, wrote in a note to clients. “Real support remains at 3.48 percent in the event of selling pressure.” Reached by phone, Vogel confirmed his comments.

Bidding Patterns

Investors bid for 2.92 times the amount of 10-year debt available last month, versus the average of 3.14 for the past 10 auctions. Indirect bidders, a class of investors that includes foreign central banks, purchased 44.4 percent of the notes, compared with 56.6 percent in November, the most since the Treasury began releasing the data in 2003. The average for the previous 10 sales was 44.5 percent.

“At the right level, it should see a reasonable level of demand from the street,” said Eric Wand, an interest-rate strategist at Lloyds Corporate Bank in London. “I still think people are preferring shorter maturities. The three-year sale seemed to go OK; 10-year is obviously riskier.”

A $32 billion three-year auction yesterday drew a yield of 1.027 percent, lower than the average forecast of 1.034 percent in a Bloomberg News survey of six of the Federal Reserve’s 18 primary dealers, those companies that are required to bid. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.06. The average at the past 10 auctions was 3.16.

Higher Than One

The yield at the three-year note auction was the first of more than 1 percent and the highest since the government sold $35 billion of the securities in July at 1.055 percent. The last sale of three-year notes, on Dec. 7, drew a yield of 0.862 percent. Indirect bidders bought 39.4 percent of the notes, compared with 36.7 percent in the December auction. The average for the past 10 sales is 42.6 percent.

Increased bank lending will help send yields to 3.6 percent by the end of March, said Tsutomu Komiya, who handles U.S. debt in Tokyo for Daiwa Asset Management Co., which oversees the equivalent of $103.5 billion and is part of Japan’s second- biggest brokerage.

Commercial and industrial loans at U.S. banks climbed for four weeks in the period ended Dec. 22, the longest run of gains in two years, based on Fed data. The figure climbed to $1.22 trillion, the most since September. It was little changed in the seven days ended Dec. 29, the latest figures available.

At the same time, bank holdings of Treasuries and agency debt have fallen for four weeks to $1.61 trillion, also a level not seen since September.

Yield Forecast

The 10-year yield will fall to 3.16 percent by March 31 and then advance to 3.63 percent by year-end, according to a Bloomberg survey of banks and securities companies, which gives the most recent forecasts the heaviest weightings.

Treasuries have declined 0.09 percent this year, according to indexes compiled by Bank of America Merrill Lynch.

Portugal sold 599 million euros ($778 million) of bonds due in 2020 at a yield of 6.716 percent, the country’s debt management agency said today. That compares with 6.806 percent at the previous auction on Nov. 10.

Investors asked for 3.2 times the amount of 10-year bonds sold, up from 2.1 times at the November sale.

Pacific Investment Management Co.’s Bill Gross said the world’s biggest bond fund wasn’t a buyer of the debt sold today at auction by Portugal.

The auction was really a pre-arranged sale to institutional and government buyers, Gross said during an interview today with Margaret Brennan on Bloomberg Television’s “InBusiness.”

German Chancellor Angela Merkel indicated that Germany is ready to revise the terms of a 750 billion-euro rescue fund for indebted states, saying Europe’s biggest economy will do whatever is necessary to protect the euro.

The Fed will release its report on regional economic conditions, known as the Beige Book at 2 p.m.

The U.S. central bank’s previous Beige Book business survey, released Dec. 1, showed five Fed banks said the economy grew “at a slight to modest” rate, five others reported a “somewhat stronger pace” and two said conditions were “mixed.”

Consumer prices rose 0.4 percent last month after a 0.1 percent increase in November, economists in a Bloomberg survey forecast before the Labor Department reports the data Jan. 14.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net Lucy Meakin in London at lmeakin1@bloomberg.net

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

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