U.S. 30-Year Bond Yield Rises Most Since 2008 on Reduced Demand at Auction

Treasury 30-year bonds tumbled, pushing yields up the most since 2008, on speculation Federal Reserve policies will stoke inflation, which sapped demand at the $16 billion offering of the securities.

The first auction of the debt since Standard & Poor’s cut the U.S. credit rating on Aug. 5 drew the lowest level of demand since February 2009. Today’s auction produced a yield of 3.750 percent, compared with the average forecast of 3.622 percent in a Bloomberg News survey of eight primary dealers.

“People didn’t show up for this one,” said Scott Sherman, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 20 primary dealers that are obligated to participate in U.S. auctions. “Increased worry about inflation has to get priced into the long bond, given the Fed’s accommodative stance. For now, there will be apprehension to buy that far out on the curve at these yield levels.”

The current 30-year bond yield increased 25 basis points, or 0.25 percentage point, to 3.77 percent at 5:01 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 4.375 percent securities maturing in May 2041 dropped 5, or $50 per $1,000 face amount, to 110 25/32.

The yield rose as much as 29 basis points, the most on an intraday basis since Nov. 21, 2008, when the S&P 500 Index soared 6.3 percent after falling to its lowest level in 11 years during a period of extreme volatility following the bankruptcy of Lehman Brothers Holdings Inc.

Bid’s Sag

At today’s auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.08, compared with an average of 2.64 at the past 10 sales.

Indirect bidders, a class of investors that includes foreign central banks, bought 12.2 percent of the bonds, compared with 37.8 percent at the July 14 sale and an average of 39.8 percent for the past 10 auctions.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 19.5 percent, compared with 21.9 percent of the securities at the last sale and the 10-sale average of 10.6 percent.

“The players that play in the long end don’t feel comfortable with all of the uncertainty that has to be factored in,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “No one is worried about short-term inflation, but with all the printing that has been done and with the possibility of more stimulus needed there is an expectation for a lot more cash that will be added to the system, and at some point that means an inflation problem.”

Record Low

On Aug. 9, 10-year Treasury yields touched a record low as the Fed vowed to keep interest rates near zero through at least mid-2013. In pledging to keep its benchmark rate at an all-time low, the Fed also discussed a range of policy tools to bolster the economy, saying it is prepared to use them “as appropriate.”

The statement fueled speculation the central bank may consider a third round of quantitative easing through bond purchases to revive a recovery it said is “considerably slower” than anticipated.

The Treasury sold $32 billion of three-year notes at a record low yield of 0.50 percent on Aug. 9 and sold $24 billion of 10-year securities yesterday at a record low 2.14 percent yield. The record low yield for a 30-year bond auction is 3.54 percent, reached in February 2009.

Bond Inflation

A bond market measure of inflation expectations the Fed uses to help determine monetary policy was at 2.88 percentage points, compared with 2.93 percentage points average for 2011. The five-year, five-year forward break-even rate projects what the pace of consumer price increases may be, beginning in 2016. It averaged 2.78 percentage points during the past five years.

U.S. debt dropped earlier, snapping a three-day surge, as the Labor Department reported that claims for unemployment insurance payments unexpectedly fell last week to a four-month low, signaling the recent slowdown in payroll gains is due to a lack of hiring, rather than more firings.

Applications for jobless benefits decreased 7,000 in the week ended Aug. 6 to 395,000, the fewest since early April. Economists forecast 405,000 claims, according to the median estimate in a Bloomberg News survey.

Real Yield

The 10-year real yield, which accounts for inflation, dropped to negative 1.45 percent yesterday, approaching the lowest since 2008.

Treasuries have surged this month, pushing 10-year yields down about 50 basis points since the start of August, as the European sovereign-debt crisis and a potential double-dip recession in the U.S. sent the Standard & Poor’s 500 Index down about 9 percent.

Volatility in the Treasury market has picked up. Merrill Lynch & Co.’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, has averaged 96.6 since the start of the month, more than the 89.3 average since the start of the year.

Thirty-year bonds have returned 18 percent this year, compared with a 7.1 percent return for Treasuries overall, according to Bank of America Merrill Lynch indexes. The bonds have gained 10.8 percent this month, leading the 2.8 percent gain in overall Treasuries, and are headed for the best month since December 2008, according to Merrill Lynch Indexes.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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