Treasuries Rally as Auction Draws Record Yield on Haven Demand

Treasuries rallied as an almost insatiable desire for the safest assets bolstered demand at the government’s sale of $13 billion in 30-year bonds, the second consecutive U.S. auction to attract a record low yield.

The long bonds were sold at a yield of 2.580 percent, down from the previous mark of 2.72 percent at a June 14 sale. Yesterday’s 10-year note auction drew a yield of 1.459 percent. Bonds of other highly rated nations including Germany, the U.K., Japan and Australia also rallied on concern central banks need to take more action to sustain faltering global growth.

“Investors are still hungry for yield, safety and liquidity in this risk-off environment,” said Aaron Kohli, an interest-rate strategist in New York BNP Paribas SA, which as a primary dealer is required to bid at auctions. “Even though yields are incredibly low, it’s better than taking a loss in risky assets, and the liquidity is worth paying for. That drove the strong demand at the auction.”

The yield on the 30-year bond fell five basis points, or 0.05 percentage point, to 2.56 percent in trading at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It touched a record low of 2.5089 percent on June 1.

The benchmark 10-year note yield declined four basis points to 1.47 percent. It touched its lowest, 1.4387 percent, on June 1.

Treasuries rose earlier even as applications for jobless benefits decreased 26,000 in the week ended July 7 to 350,000, the fewest since March 2008, Labor Department figures showed. Economists forecast 372,000 claims, according to the median estimate in a Bloomberg News survey.

Debt Auctions

The bond auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.7, same as the average at the past 10 sales.

Indirect bidders, a class of investors that includes foreign central banks, bought 36.8 percent of the 30-year bonds, the highest since September, compared with 32.5 percent at the June auction. The average for the past 10 offerings is 31.6 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 20.1 percent versus 24 percent at last month’s sale. The average at the past 10 auctions is 17.3 percent.

The U.S. sold $21 billion of 10-year notes yesterday at a record-low yield of 1.459 percent. The direct bid was a record 45.4 percent, compared with direct bids of 10.2 percent for the $32 billion three-year note sale on July 10. Today’s offering was the last of three Treasury note and bond auctions this week totaling $66 billion.

‘Tremendous Demand’

“What yesterday and today’s auctions tell you is that there’s still tremendous demand for Treasuries, even at these levels,” said Thomas Roth, senior trader in New York at Mitsubishi UFJ Securities USA Inc. “It’s the same type of things we’ve been seeing, a continuous flow of money into bond funds. It’s safe-haven money looking for a home.”

Thirty-year bonds have returned 7.8 percent this year, compared with 5 percent for 10-year notes and 0.1 percent for two-year debt, according to indexes compiled by Bank of America Merrill Lynch.

The term premium, a model created by the Fed that includes expectations for interest rates, growth and inflation, showed Treasuries are the almost most expensive ever. The gauge fell to a record negative 0.9617 percent on July 10. It was negative 0.9435 percent today.

Volatility fell to 63.4 basis points, according to Bank of America Merrill Lynch’s MOVE index. It dropped to a five-year low of 56.7 basis points on May 7, and has averaged 76 basis points this year, touching a 2012 high of 95.4 basis points on June 15. It reached a record high of 264.6 basis points in October 2008 as the financial crisis intensified. The index measures price swings based on options.

‘Easing Bias’

The Fed sold $7.93 billion of Treasuries today due from July 2013 to January 2014 as part of its Operation Twist program. The central bank announced on June 20 it would extended the program, which is replacing $667 billion of shorter-term securities in its holdings with longer-term bonds to keep borrowing costs down.

The central bank bought $2.3 trillion of securities in two rounds of so-called quantitative easing from 2008 to 2011 to support the economy. Minutes from the Fed’s June policy meeting, released yesterday, failed to signal more stimulus measures to spur economic growth.

“There’s the expectation of the Federal Reserve doing more,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., a primary dealer. “The easing bias is still intact. It’s a desire for safe, dollar-denominated assets, driven partly by the Fed and by what’s going on in Europe.”

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: Dave Liedtka at dliedtka@bloomberg.net

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