Treasuries Rise After Two-Year Note Auction; Yields Fall Toward 2011 Low
Treasuries rose, pushing two-year note yields toward the lowest level this year, after the U.S. government’s $35 billion auction of the securities had the highest level of demand since January.
Treasuries have gained on concern Europe’s debt crisis is worsening and signs the U.S. economy is weakening. Two-year notes drew a yield of 0.560 percent at today’s sale, compared with an average forecast of 0.562 percent in a Bloomberg News survey of nine of the Federal Reserve’s 20 primary dealers. The bid-to-cover ratio, a gauge of demand that compares total bids with amount of securities sold, was 3.46, the highest since it measured 3.47 four months ago.
“The data’s been a little weak in the U.S., and the uncertainty in Europe is leading to a flight-to-quality bid in Treasuries,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “The fear in the world economy is slowly but surely beginning to build up again.”
The yield on the current two-year note dropped two basis points, or 0.02 percentage point, to 0.50 percent at 5:20 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 0.625 percent security maturing in April 2013 gained 1/32, or 31 cents per $1,000 face amount, to 100 7/32.
The two-year note yield touched 0.495 percent yesterday, the lowest level since Dec. 7. The benchmark 10-year note yield fell two basis points today to 3.11 percent after touching 3.09 percent on May 18, the lowest level since Dec. 7.
Bill Shortage
A shortage of Treasury bills and the low rate of those still in the market have led some investors to move out the yield curve into two-year notes, adding to the demand at today’s auction, according to Dan Mulholland, a Treasury trader in New York at RBC Capital Markets LLC, one of 20 primary dealers required to bid at government debt auctions.
The Treasury sold $27 billion of three-month bills and $24 billion of six-month bills at almost record low rates yesterday. The three-month securities sold at a rate of 0.055 percent, compared with the record low 0.025 percent on May 9, while the six-month bills were priced at 0.100 percent, compared with the record 0.065 percent on May 9.
“Every basis point is a lot at this point,” Mulholland said. “The lack of supply in the bill market is probably forcing” some investors to buy two-year notes, he said.
Bill supply has slid since February after the Treasury eliminated $195 billion in short-term debt it sold on behalf of the Fed to help avoid exceeding the U.S. debt limit.
At today’s two-year note auction, indirect bidders, a class including foreign central banks, purchased 31.3 percent of the notes, compared with 37.9 percent at the April 26 offering and an average of 33.1 percent for the past 10 sales.
Direct Bidders
Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 19.1 percent of the notes, compared with 13.4 percent last month and an average of 13.5 percent at the last 10 auctions.
The offering is the first of three note sales this week totaling $99 billion. The Treasury is scheduled to sell $35 billion in five-year debt tomorrow and $29 billion of seven-year notes on May 26.
Portuguese 10-year yields surged to a record high of 9.85 percent on concern Europe’s debt crisis is worsening. Greek yields fluctuated between gains and losses after the government endorsed yesterday plans to sell stakes in state-owned companies and cut more than 6 billion euros ($8.5 billion) in spending.
“Treasuries aren’t going to lose a lot of their premium because I don’t think any of these issues have been solved,” said John Briggs, a U.S. government bond strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc’s RBS Securities unit, a primary dealer.
Manufacturing Gauge
Two-year note yields slid earlier as a Richmond Fed gauge of manufacturing in the Carolinas, the District of Columbia, Maryland, Virginia and West Virginia dropped this month more than economists forecast to negative 6.
Sales of U.S. new homes unexpectedly increased 7.3 percent in April to a 323,000 annual pace, a four-month high, the Commerce Department reported. The median forecast of 75 economists in a Bloomberg News survey was for no change.
The yield on 10-year Treasuries has fallen below the annual inflation rate this month for the first time since 2008, making the securities less attractive. The spread, known as the real yield, was negative six basis points today.
Consumer Prices
The consumer price index increased 3.2 percent in the 12 months ended in April, the biggest gain since October 2008, figures from the Labor Department showed this month. The so- called core measure excluding food and energy rose 1.3 percent from April 2010.
The central bank purchased $6.4 billion of bonds due from November 2013 to May 2015 today to support the economy under the $600 billion program of debt purchases ending next month
Fed funds futures indicated a 15 percent chance the central bank will raise its target lending rate by December, down from a 24 percent probability a month ago. The benchmark has held at zero to 0.25 percent since December 2008.
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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