Treasuries Advance After $21 Billion 10-Year Auction Draws Strong Demand

Treasuries gained for a second day after the U.S. sale of $21 billion in 10-year notes attracted higher-than-average demand, bolstered by concern Europe’s sovereign-debt crisis is far from a resolution.

The securities drew a yield of 2.020 percent, compared with a forecast of 2.050 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 3.53, the strongest level since April 2010. The Fed is holding its December meeting today.

“We’re still being driven largely by what’s happening in Europe,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “That crisis has been driving everything and there doesn’t appear to be any endgame in sight. As long as that’s the case, it’s going to help fuel a flight-to-quality bid.”

The yield on the current 10-year note fell three basis points, or 0.03 percentage point, to 1.99 percent at 1:26 p.m. in New York, according to BGCantor Market Data. Earlier it rose to as high as 2.06 percent. Thirty-year bond yields decreased two basis points to 3.04 percent after advancing earlier to 3.10 percent.

“Clearly investors like Treasuries at these levels, given continued concern about risk assets headed into the end of the year as concern about a weakening Europe and economy remains,” said Scott Graham, head of government-bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago, which as a primary dealer is required to bid in U.S. debt sales. “You are not supposed to be a big seller of Treasuries right now.”

Fed Meeting

The Fed will hold interest rates near zero, according to all 64 economists in a Bloomberg survey before a statement from policy makers at 2 p.m.

Treasuries fell earlier as Europe’s bailout fund sold the maximum amount at its first auction of bills, reducing refuge demand. They briefly pared declines after German Chancellor Angela Merkel rejected raising the upper limit of funding for another rescue mechanism.

At today’s auction, indirect bidders, an investor class that includes foreign central banks, purchased 61.9 percent of the notes, compared with an average of 46.7 percent for the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 8.4 percent, versus an average of 10.1 percent at the past 10 auctions.

Record in September

Last month’s offering of 10-year notes drew a yield of 2.03 percent, and the September sale yielded a record low 2 percent.

Ten-year notes have returned 15.6 percent this year, outperforming the 9.2 percent gain by the broader Treasury market, according to Bank of America Merrill Lynch indexes.

The U.S. is selling $78 billion in notes, bonds and inflation-indexed debt this week. It’s due to auction $13 billion of 30-year debt tomorrow and $12 billion of five-year Treasury Inflation-Protected Securities on Dec 15 after selling $32 billion in three-year notes yesterday to a record bid-to- cover ratio of 3.62.

The European Financial Stability Facility issued 1.97 billion euros ($2.6 billion) of 91-day bills at an average yield of 0.2222 percent, the Bundesbank said. Investors bid for 3.2 times the amount sold, the German central bank said. The EFSF sells debt to finance rescue loans extended to Europe’s high debt and deficit nations.

U.S. Retail Sales

Treasury yields remained higher earlier after a report showed U.S. retail sales increased in November at the slowest pace in five months. They rose 0.2 percent following a 0.6 percent advance in October that was more than initially reported, Commerce Department figures showed. Economists forecast a 0.6 percent November increase, according to a Bloomberg survey.

Recent reports have shown U.S. unemployment fell, manufacturing picked up and consumer confidence climbed by the most in eight years.

All of the 64 economists in a Bloomberg News survey predicted the Fed will keep its target lending rate today at zero to 0.25 percent, where it has been since December 2008.

The central bank will probably revise its pledge to hold rates close to zero through mid-2013 as the need for large-scale asset purchases diminishes, another Bloomberg survey showed.

The Fed is replacing $400 billion of shorter maturities in its holdings of Treasuries with longer-term debt to cap borrowing costs in a plan it announced in September. It purchased $2.3 trillion of Treasury and mortgage-related bonds from 2008 through June in two rounds of quantitative easing to support the economy.

To contact the reporters on this story: Susanne Walker in New York at swalker33@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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