Treasuries Rise as Two-Year Note Auction Attracts Record Demand

Treasuries rose for a second day as concern that Greece’s bailout may falter and U.S. deficit- reduction plans are elusive spurred record demand at the U.S. sale of $35 billion in two-year debt.

The bid-to-cover ratio at today’s sale, which gauges demand by comparing total bids with the amount of securities offered, was 4.07, matching the record high in November 2011 and compared with an average of 3.79 for the past 10 sales. The Federal Reserve bought $1.9 billion of Treasuries today and is acquiring as much as $18.76 billion in six purchases this week. Senate Majority Leader Harry Reid said he was “disappointed” by a lack of progress in addressing the so-called fiscal cliff.

“There are fundamental things in place that are putting downward pressure on yields,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The fiscal-cliff issue is the major near-term overhang. The Greek bailout was unable to instill much confidence in the pace of reform in Europe.”

The benchmark 10-year yield fell three basis points, or 0.03 percentage point, to 1.64 percent at 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 added 7/32, or $2.19 per $1,000 face amount, to 99 28/32.

The current two-year yield was little changed at 0.26 percent.

Bid Data

The notes auction drew a yield of 0.270 percent at today’s auction, compared with a forecast of 0.272 percent in a Bloomberg News survey of seven of the Fed’s primary dealers.

Indirect bidders, an investor class that includes foreign central banks, purchased 34.4 percent of the two-year notes, compared with an average of 31.4 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 23.6 percent of the securities, compared with a record 38.2 percent at the October sale, and an average of 14.6 percent for the past 10 auctions.

Investors are hiding in the securities until they get through the fiscal negotiations in Washington, said Scott Graham, head of government-bond trading in Chicago at Bank of Montreal (BMO)’s BMO Capital Markets unit, a primary dealer.

Investor Positions

Investors in Treasuries held bullish bets unchanged this week, while cutting shorts, according to a survey by JPMorgan Chase & Co.

The proportion of net longs was at four percentage points in the week ending yesterday, according to JPMorgan, up from two percentage points the week ending Nov. 19.

The percent of outright longs remained at 17 percent, while the percent of outright shorts, or bets the securities will fall in value, dropped to 13 percent, from 15 percent, according to the survey.

Investors raised neutral bets to 70 percent from 68 percent, the survey reported, matching the highest level since August.

Two-year notes have returned 0.2 percent this year, compared with a 2.4 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes. The two-year securities returned 1.5 percent in 2011, while Treasuries overall rose 9.8 percent.

The U.S. will sell $35 billion of five-year debt tomorrow and $29 billion of seven-year notes on Nov. 29.

Fed Buys

The Fed purchased Treasuries maturing from February 2023 to May 2030 today as part of its Operation Twist program to put downward pressure on long-term borrowing costs, according to the Fed Bank of New York’s website. The central bank is selling shorter-term Treasuries and buying those in six to 30-years.

U.S. securities were supported earlier today on speculation a plan agreed on by euro-area finance ministers for Greece to buy back its bonds will fail to contain the region’s debt crisis.

Euro-region finance ministers meeting in Brussels overnight cut the rates on Greece’s bailout loans, suspended interest payments for a decade, gave the country more time to repay and engineered a Greek bond buyback.

The approach of the fiscal cliff budget deadline in the U.S. has been accompanied by low volume and low volatility in the Treasury market.

Price Swings

Volatility in U.S. government bonds dropped to the lowest in more than five years yesterday. Bank of America Merrill Lynch’s MOVE index, which measures price swings for Treasuries based on options, fell to 53.5, the least since May 2007.

Treasury trading volume dropped yesterday to $151 billion, compared with the 2012 daily average of $240 billion, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt.

Treasury yields have remained close to historic lows amid fiscal cliff negotiations. President Barack Obama is working with lawmakers to try to ease the measures to keep gross domestic product growing. So far, talks between Obama and congressional Republicans haven’t yielded any significant progress. Ten-year yields have been in a range of 35 basis points since the middle of August.

Demand for goods such as machinery and electronics climbed in October by the most in five months, signaling companies are starting to overcome concern the looming fiscal cliff will derail the U.S. economy.

Bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, rose 1.7 percent last month, the most since May, the Commerce Department reported today in Washington. Orders for all durable goods were little changed, beating the median forecast of economists surveyed by Bloomberg that projected a 0.7 percent drop.

“The numbers are better for the growth bulls than for the growth bears,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA Inc., a primary dealer. “We’ve got an economy that’s still trending sideways.”

To contact the reporters on this story: 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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