Treasuries Surge on Refuge Demand as Auctions Set Records
Treasury yields fell close to all- time lows as an almost insatiable desire for the safest assets amid signs global growth is stalling helped the U.S. draw record rates at 10- and 30-year debt auctions.
U.S. government debt rallied for a third consecutive week as Europe’s economy slipped toward its second recession in three years amid a worsening debt crisis, lower-than-forecast growth in China and the Federal Reserve disappointing some traders looking for a hint of more stimulus. Fed Chairman Ben S. Bernanke will present his semi-annual report on the outlook for the economy and monetary policy to Congress on July 18.
“Debt sales were strong even though yields were not far off their record lows, which underscores the fear in investor sentiment,” said Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York. “The flight-to-quality demand is still high given the economic slowing in the U.S. and around the world, and the fact that we are no closer to a European resolution.”
The yield on the 30-year bond fell nine basis points, or 0.09 percentage point, on the week to 2.57 percent in 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 six basis points to 1.49 percent. It touched its lowest, 1.4387 percent, also on June 1.
The long bonds were sold on July 12 at a yield of 2.580 percent, down from the previous mark of 2.72 percent at a June 14 sale. The 10-year note auction the day before drew a yield of 1.459 percent, compared with the previous low of 1.622 percent set last month.
The note auction attracted record-high demand from a group of investors that include pension funds and insurance companies.
“The theme for the week was the strength of the auction despite record low yields -- demand was very strong, and there remains very strong safe-haven buying in the markets,” said Larry Milstein, managing director in New York of government- and agency-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “Any dips should be quickly purchased unless something changes overseas in Europe. Buying dips in Treasuries is still the profitable trade.”
Investors outside of the Fed’s primary dealer network that place their bids at Treasury auctions directly with the government, known as direct bidders, have purchased $32 billion of the $153 billion 10-year notes and $15.1 billion of the $97 billion 30-year bonds sold at Treasury auctions so far this year, government data show.
Direct purchases of 10-year notes have almost tripled compared with this point last year, and have increased 43 percent for the long bond. Direct bidders bought a record 45.4 percent of the Treasury’s $21 billion offering of 10-year notes on July 11, or $9.5 billion. They bought 20.1 percent, or $2.6 billion, of the government’s $13 billion sale of 30-year bonds
During the first six months of 2012, primary-dealer trading of U.S. government securities maturing in six years or longer averaged $173.3 billion per week, a 14 percent increase over the comparable period in 2007, according to Fed data. Issuance of 10-year notes and 30-year bonds totaled $216 billion in the first half of this year, compared with $56 billion in the comparable period in 2007.
“Investors are still hungry for yield, safety and liquidity in this risk-off environment,” said Aaron Kohli, an interest-rate strategist in New York at 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.”
Thirty-year bonds have returned 8.5 percent this year, compared with 5.2 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 0.9326 percent yesterday.
Volatility fell to 63.3 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.
Treasury 10-year note yields will fall to 1.35 percent by the end of the year, according to Credit Suisse Group AG, a primary dealer.
“The risk-appetite rally has stalled,” Credit Suisse researchers wrote in a note yesterday. “The market now must consider the real possibility of recession before the Fed even gets around to executing an exit strategy.”
The European Central Bank is prepared to ease monetary policy, including cutting its deposit rate further, if the region’s financial crisis worsens, according to a Medley Global Advisors report obtained by Bloomberg News.
The Fed announced on June 20 it would extend its Operation Twist 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 failed to signal more stimulus measures to spur economic growth.
Consumer prices were unchanged last month, after falling 0.3 percent in May, according to a Bloomberg survey of economists before the report on July 17.
“There’s a lot of concerns out there, and global growth is diminishing,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Federal Reserve. “The expectations of central banks helping out, doing something” to stimulate activity, are growing.
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