Jan. 25 (Bloomberg) -- Treasuries climbed, pushing yields on 10- and 30-year debt down the most this year, as an official said President Barack Obama will propose a five-year freeze of non-security discretionary spending to help cap deficits.
The government’s sale of $35 billion of two-year notes attracted more demand than the average of the last 10 auctions of the securities. Obama will call in his State of the Union speech for the spending freeze as a way to reduce the federal government’s budget shortfall, according to Melody Barnes, director of the president’s domestic policy council. The Federal Reserve bought $7.7 billion of Treasuries to help spur growth.
“It’s too early to tell whether words will turn into action, but the market is romancing the concept,” said Russ Certo, a managing director and co-head of rates trading at Gleacher and Co. in New York. “In a risk-off day with equities low, the auction coming in on the screws, aggressive buying from the Fed and a preamble to the State of the Union news, Treasuries have responded with a bid.”
Thirty-year bond yields tumbled as much as nine basis points, the most on an intraday basis since Dec. 31, before trading at 4.49 percent at 5:15 p.m. in New York, down seven basis points, according to BGCantor Market Data. The price of the 4.25 percent security due in November 2040 rose 31/32, or $9.69 per $1,000 face amount, to 96 1/32. One basis point is 0.01 percentage point.
The benchmark 10-year note yield dropped as much as 10 basis points, the most since Dec. 29, to 3.31 percent. The current two-year yield fell five basis points to 0.58 percent.
Obama’s freeze wouldn’t apply to spending for Social Security, Medicare, Medicaid, Homeland Security, the Defense Department or interest payments on the national debt. In his address last year, he proposed a three-year freeze on most domestic spending, not including national security or defense.
The president also will look for savings in security and defense spending, and will endorse a proposal by Defense Secretary Robert Gates to cut $78 billion from the Pentagon budget over five years, Barnes said in a Bloomberg TV interview.
The fiscal 2011 budget Obama proposed last year totaled $3.8 trillion, and the administration forecast the deficit would be $1.4 trillion, compared with the $1.3 trillion shortfall for fiscal 2010.
“There are concerns about long-term deficits, and there is a big difference between talking about it and the policies getting done -- but the tone change is positive for Treasuries,” said John Briggs, a U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities Inc. in Stamford, Connecticut.
Tax Cut Extension
The proposal will come seven weeks after Obama and congressional Republicans agreed on an $858 billion deal, later passed by Congress, to extend Bush-era tax cuts for two years.
The Treasury two-year note auction drew a yield of 0.65 percent, compared with a forecast of 0.663 percent in a Bloomberg News survey of 7 of the Fed’s 18 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.47, compared with an average of 3.35 at the previous 10 sales.
Indirect bidders, an investor class that includes foreign central banks, purchased 27 percent of the notes, compared with an average of 34.5 percent for the past 10 sales.
“It was a fine, unexciting auction -- it was ham on rye, and we are on to the five-year auction,” said RBS’s Briggs, whose firm is obligated as a primary dealer to bid at Treasury offerings.
The Treasury will sell $35 billion in five-year notes tomorrow and $29 billion of seven-year debt on Jan. 27.
Last month’s two-year note sale drew a yield of 0.74 percent, the highest level since May. The record low yield of 0.40 percent was reached in the October sale.
Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, bought 14.9 percent of the notes, compared with an average of 15.8 percent at the past 10 offerings.
The Fed bought today Treasuries due from February 2015 to June 2016. The amount was 27.6 percent of what holders offered, compared with an average of 34.2 percent at the past 10 buys. The purchases are part of the central bank’s program to buy up to $600 billion in U.S. debt through June to spur economic growth and employment.
The Standard & Poor’s 500 Index was little changed after falling 0.8 percent.
Treasuries earlier erased gains as U.S. consumer confidence rose in January to the highest level in eight months, more than economists forecast. The Conference Board’s index of sentiment increased to 60.6, from a revised 53.3, figures from the New York-based private research group showed today. Economists in a Bloomberg News survey projected a rise to 54.
The International Monetary Fund raised its forecast for global economic growth this year, reflecting stronger U.S. output based on tax-cut extensions, while emerging nations lead the recovery.
The world economy will grow 4.4 percent, more than the 4.2 percent expected in October, it said. Expansion next year is projected to reach 4.5 percent, unchanged from October, the IMF said in an update to its World Economic Outlook report.
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