Treasuries weakened for the first time in six days on speculation Spain’s fiscal problems won’t require a bailout, sapping demand at a $21 billion auction of 10-year notes.
Bond yields in Spain and Italy fell, reducing concern the European debt crisis was widening, which drove 10-year yields below 2 percent yesterday for the first time in four weeks. The primary dealers that trade with the Federal Reserve were awarded the largest share at today’s note sale since the October auction.
“You see the euro zone being the key to this, day-to-day in the absence of economic numbers,” said Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee. “As that tone’s a little better, it will get some of the Treasury buyers to turn and” sell.
The yield on the current 10-year note rose six basis points, or 0.06 percentage point, to 2.04 percent, at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. The 2 percent securities maturing in February 2022 fell 15/32, or $4.69 per $1,000 face amount, to 99 22/32. Two-year note yields were little changed at 0.29 percent.
Benchmark 10-year note yields touched a 2012 high of 2.4 percent on March 20 and a 2012 low of 1.79 percent on Jan. 31. The 10-year note yields are 84 basis points below the rate of consumer-price inflation. It reached 49 basis points below on March 19.
Today’s auction drew a yield of 2.043 percent, compared with a forecast of 2.040 percent in a Bloomberg News survey of 10 of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.08, compared with an average of 3.13 for the past 10 sales.
“The market is trading a little heavy,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “The recent run-up in prices was a little too aggressive and now we are seeing some giveback of the rally in Treasuries.”
Primary dealers purchased 50.5 percent of the notes, the most since 58.5 percent in October. Indirect bidders, an investor class that includes foreign central banks, purchased 38.5 percent of the debt, compared with an average of 43.1 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 11 percent of the securities at the sale, compared with an average of 14.3 percent for the past 10 auctions.
The Treasury is selling $66 billion of notes and bonds this week, according to Treasury Department data. It’s due to auction $13 billion of 30-year debt tomorrow after a $32 billion three- year note sale yesterday that drew a yield of 0.427 percent, percent, compared with a forecast of 0.424 percent in a Bloomberg News survey of primary dealers.
Ten-year U.S. debt has lost 0.15 percent this year, matching the losses in the broader Treasury market. The notes returned 17 percent in 2011, almost double the 9.8 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes.
Benchmark Treasury yields earlier touched 1.99 percent today, matching the so-called lower Bollinger level. Bollinger bands gauge volatility by plotting standard deviations above and below a moving average. Analysts use them to determine a probable range for a rate or security.
Treasuries rallied yesterday as Spanish 10-year yields climbed 22 basis points to 5.98 percent. Italy’s increased 23 basis points to 5.69 percent.
The difference between Spanish and German 10-year yields widened to 4.37 percentage points today, the most since November, before narrowing. The Spanish 10-year note yield declined 0.11 percentage point to 5.83 percent and the Italian 10-year yield fell 0.16 percentage point to 5.50 percent.
“You have pressure on the flight-to-quality trade,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “It wasn’t as bad as everybody thought it was in Spain. Not a lot of people want to buy 2 percent notes; 2.10 percent gives you a little bit of a hedge.”
Ten-year Treasuries yield 22 basis points more than similar-maturity debt in Germany, reflecting demand for bunds because of Europe’s fiscal crisis. The spread widened to 49 basis points on April 3, the most since January 2011.
Volatility declined yesterday. Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options, fell to 75.1 basis points, the lowest since March 13. It reached 93.3 basis points on March 20, the highest level this year.
The Fed sold $8.6 billion in Treasuries maturing between July 2012 and January 2013 as part of the central bank’s effort to replace $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs.
The Fed said the economy maintained its expansion in all 12 of its regions as manufacturing, hiring and retail sales showed signs of strength in the face of higher fuel prices.
“The economy continued to expand at a modest to moderate pace from mid-February through late March,” the Fed said today in its Beige Book business survey, published two weeks before the Federal Open Market Committee meets to set monetary policy. “Hiring was steady or showed a modest increase across many districts.”