Treasury Sells 10-Year Notes at Record Yield
The Treasury sold $21 billion of 10- year notes at a record low yield as speculation France may lose its top credit rating amid Europe’s debt crisis bolstered the refuge appeal of U.S. government securities.
The bonds drew a yield of 1.90 percent, compared with a forecast of 1.928 percent in a Bloomberg News survey of nine 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 3.29, versus an average of 3.11 for the past 10 auctions. It was the second of three note and bond auctions totaling $66 billion this week.
“Risk aversion continues to rule the day as the European situation remains worrisome,” said Suvrat Prakash, an interest- rate strategist in New York at BNP Paribas SA, one of the primary dealers that trade directly with the Fed. “That we are auctioning this supply at such low yields is a good sign for tomorrow’s auction, as investors seem to care more about safety than return.”
The yield on the current 10-year note fell seven basis points, or 0.07 percentage point, to 1.90 percent at 3:48 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent security due in November 2021 rose 19/32, or $5.94 per $1,000, face amount, to 100 7/8. Thirty-year bond yields fell six basis points to 2.96 percent.
Haven Demand
Demand for Treasuries as a haven has pushed debt due in 10 years or longer up 28 percent in the past 12 months, the most among 144 government-bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Yields on 10-year notes fell more than 140 basis points in 2011 as Europe’s debt crisis intensified. The securities returned 17 percent last year, outperforming the 9.8 percent gain by the broader Treasury market, according to Bank of America Merrill Lynch indexes.
The bid-to-cover ratio of 3.29 at today’s auction was the lowest since 2.64 at the November 2011 offering. At the Treasury’s last sale of the notes in December, the ratio was 3.53.
Indirect bidders, a group that includes foreign central banks, bought 38.3 percent of the amount sold, compared with 61.9 percent in the prior auction. Primary dealers bought 44.3 percent, compared with 29.7 percent in the previous sale. Direct bidders purchased 17.4 percent.
Last month’s offering of 10-year notes drew a yield of 2.02 percent, near the then-record low 2 percent yield at the September sale.
‘There’s a Need’
“There’s a need for the securities,” Scott Graham, head of government-bond trading in Chicago at Bank of Montreal’s BMO Capital Markets Corp., a primary dealer, said before the auction. “There’s a rumor that France has been given a 12-hour notice for a downgrade.”
French Finance Minister Francois Baroin denied having been notified by a ratings company about a downgrade of France’s top credit ranking.
The U.S. is due to auction $13 billion of 30-year debt tomorrow, after selling $32 billion in three-year notes yesterday at a record bid-to-cover ratio of 3.73. This week’s auctions will raise $30.5 billion of new cash as $35.5 billion of maturing securities are held by the public, according to Treasury Department data.
“The Treasury is the one vehicle globally where you can move billions into the marketplace very quickly, even though the yield is not very attractive,” said William Larkin, a fixed- income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “It’s the only place a lot of capital can run to -- in and out.”
Low Volatility
Volatility in the Treasury market is near its lowest level in almost seven months. Bank of America Merrill Lynch’s MOVE index (MOVE), which measure price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, rose to 80.2 yesterday from the lowest point since June 13. The 2011 average was 94.1, with a high of 117.8 on Aug. 8 and a low of 71.5 on May 31.
Primary-dealer holdings of government securities, including bills, coupon securities and inflation-indexed debt, increased to the most since November 2010. The 21 primary dealers held $74.7 billion of the securities as of Dec. 28. The firms held $61.6 billion of Treasury (.LTTSYS) notes and bonds as of Dec. 28, a record amount.
Treasuries held in custody at the Fed for foreign central banks and other official investors dropped to $2.67 trillion at the end of December from $2.73 trillion at the end of November, according to data compiled by Bloomberg.
The Fed purchased $2.25 billion in Treasuries today under its program of replacing $400 billion of shorter maturities in its holdings with longer-term debt to cap borrowing costs. It bought $2.3 trillion of Treasury and mortgage-related bonds from 2008 through June in two rounds of quantitative easing to support the economy.
The U.S. economic expansion improved last month across most of the country while hiring was limited and housing remained stagnant, the central bank said in its Beige Book anecdotal business survey released today in Washington.
The economy “expanded at a modest to moderate pace” from late November through the end of December the Fed said. At the same time, most industries saw “limited permanent hiring,” and the housing market remained “sluggish.”
“The Beige Book suggests a recovery, while on questionable footing, continues to make marginal progress toward sustainability,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Instead, the market is focusing on other risks facing the global recovery -- namely, Europe.”
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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