Treasuries Tumble as 7-Year Note Sale Attracts Weaker-Than-Average Demand

Treasuries fell for a second day as the U.S. sold $29 billion in seven-year securities to lower- than-average demand in the final of seven auctions of $177 billion of notes, bonds and inflation-indexed debt over the past two weeks, the most ever.

Thirty-year bond yields reached a one-week high as the Federal Reserve prepared to make its final 2011 purchase of long-term Treasuries tomorrow and sales of existing homes rose. The seven-year auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.68, versus 3.2 last month and an average 2.83 at the past 10 sales.

“It was a pretty weak auction; it’s setting a bad tone for the balance of the year,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., one of 21 primary dealers that are obliged to bid in U.S. debt sales. “The Fed buybacks have been supporting the bond market of late. Given that the Fed isn’t buying anymore this year it makes for a weak outlook to end the year.”

Yields on 30-year bonds climbed seven basis points, or 0.07 percentage point, to 3 percent at 5:08 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 3.01 percent, the highest level since Dec. 14, after falling earlier to as low as 2.90 percent. The 3.125 percent securities maturing in November 2041 dropped 1 1/2, or $15 per $1,000 face amount, to 102 14/32.

Current seven-year note yields rose three basis points to 1.41 percent. Ten-year yields increased four basis points to 1.97 percent and touched 1.98 percent, also the highest since Dec. 14. They fell earlier to as low as 1.89 percent.

Purchase Tomorrow

The Fed is scheduled to purchase as much as $5 billion tomorrow of Treasuries due in 2020 and 2021 in its last buy of the year in a program to lower borrowing costs. It is replacing $400 billion of short-term debt in its portfolio with longer- term securities through June.

The central bank sold $8.12 billion of Treasuries due in 2013 and 2014 in the first of two offerings today. It sold $8.62 billion of debt due in 2013 in the second sale.

The seven-year notes sold today drew a yield of 1.430 percent, compared with a forecast of 1.423 percent in a Bloomberg News survey of eight primary dealers. The last offering of the maturity, on Nov.23, drew a record low yield of 1.415 percent, and notes at the October sale yielded 1.791 percent.

Foreign Central Banks

Indirect bidders, an investor class that includes foreign central banks, purchased 42 percent of the notes, compared with an average of 42.5 percent for the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 12.9 percent, versus an average of 10.8 percent at the past 10 auctions.

Seven-year Treasuries have returned 13.2 percent this year, compared with a 9.6 percent gain by the broader Treasury market, according to Bank of America Merrill Lynch Indexes.

The U.S. sold $35 billion yesterday of five-year debt at a record low yield of 0.88 percent. It auctioned an equal amount of two-year notes the previous day at a yield of 0.24 percent, up from a record low 0.222 percent in August.

The government last week auctioned $78 billion in notes, bonds and inflation-linked debt. It sold $12 billion in five- year Treasury Inflation Protected Securities Dec. 15 at a record low yield of negative 0.877 percent. A $13 billion sale of 30- year bonds Dec. 14 drew a record low yield of 2.925 percent and a bid-to-cover ratio of 3.05, the highest in 11 years. Auctions of 10- and three-year notes also drew higher-than-average demand as investors sought refuge.

Existing-Home Sales

Treasury 30-year bond yields rose earlier today as data showed sales of existing homes in the U.S. increased more than forecast. The National Association of Realtors reported the sales were up 4 percent to a 4.42 million annual pace, versus a 2.2 percent gain forecast in a Bloomberg News survey.

Ten- and 30-year yields briefly dropped amid fading optimism that a European Central Bank loan program to euro-area banks would restore confidence in sovereign borrowers and help stem the euro region’s debt crisis. The ECB awarded 489 billion euros ($638 billion) in 1,134-day loans in its longer-term refinancing operation, the most ever in a single operation and more than the median estimate of 293 billion euros in a Bloomberg News survey.

Ten-year note yields reached 1.80 percent on Dec. 19, the lowest level since Oct. 4, as investors sought safety amid European debt turmoil.

Rejection of Lows

“We’ve seen a rejection of the lows in yield as the market is stabilizing around these levels,” said Richard Gilhooly, an interest-rate strategist at Toronto-Dominion Bank’s TD Securities unit. in New York. “U.S. data continues to come out better, which has taken Treasuries off of their lows. And Europe blowing up has kept yields low in the U.S., which has ultimately been good for the U.S. economy.”

U.S. consumer spending rose in November for a fifth month, a Bloomberg News survey forecast before a government report due Dec. 23.

The U.S.’s AAA rating will probably be cut by Fitch Ratings by the end of 2013 unless lawmakers are able to formulate a plan to reduce the budget deficit after next year’s congressional and presidential elections.

“Without such a strategy, the sovereign rating will likely be lowered,” New York-based Fitch said in a statement today. “Agreement will also have to be reached on raising the federal debt ceiling, which is expected to become binding in the first half of 2013.”

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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