Treasuries Drop as Risk Appetite Increases, Fed Meets

Treasuries fell, pushing 10-year yields to a two-week high, as investors sought higher-yielding assets and the Federal Open Market Committee began a two-day meeting amid forecasts it will decide to buy more bonds to spur the economy.

U.S. government debt declined even as the Treasury sold $32 billion in three-year securities at a record low yield of 0.327 percent. The auction was the first of three note and bond sales this week totaling $66 billion. Stocks rose as risk appetite gained amid signs Europe’s fiscal crisis may ease.

“The onset of supply is one factor, as is a positive move in the stock market,” said Dan Mulholland, head of U.S. Treasury trading in the capital-markets unit of BNY Mellon Corp. in New York. “The FOMC meeting is pretty critical.”

The benchmark 10-year note yield increased four basis points, or 0.04 percentage point, to 1.65 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 1.66 percent, the highest level since Nov. 27. The price of the 1.625 percent security due in November 2022 dropped 11/32, or $3.44 per $1,000 face amount, to 99 23/32.

The yield on the current three-year security rose as much as one basis point to 0.33 percent before closing little changed at 0.32 percent.

The Standard & Poor’s 500 Index climbed as much as 1.1 percent after German investor confidence jumped and as Greece drew enough bonds to a sovereign-debt buyback crucial to unlocking aid from the International Monetary Fund. The index pared gains to 0.7 percent amid concern that a budget showdown in Washington may push the U.S. economy into recession.

Treasury Supply

The U.S. will auction $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds on Dec 13. The offerings will raise $25.7 billion of new cash as maturing securities held by the public total $40.2 billion, according to the Treasury.

At today’s three-year debt auction, direct bidders, non- primary-dealer investors that place their bids directly with the Treasury, bought a record 24.8 percent of the notes. They purchased an average of 12.5 percent at the past 10 sales.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 3.36, versus 3.41 at the last sale.

Indirect Bidders

Indirect bidders, an investor class that includes foreign central banks, purchased 21.9 percent of the notes, compared with an average of 31.5 percent for the past 10 sales.

Primary dealers bought 53.3 percent of the securities today, the most since August.

The previous record-low yield at a three-year note auction was 0.334 percent in September 2011. The securities yielded 0.392 percent at the Nov. 6 sale.

“It was a very good auction; it came where everyone expected it,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., which as a primary dealer is obliged to bid at U.S. debt auctions. “The directs bought more than the indirects, and we haven’t seen that before. There’s a lot in play with the FOMC tomorrow and the fiscal- cliff negotiations between the House and the president.”

Three-year notes have returned 0.6 percent this year, compared with a 2.7 percent return for Treasuries overall, according to Bank of America Merrill Lynch indexes.

Fed Meeting

The Fed will announce tomorrow after the policy meeting that it will begin buying $45 billion in Treasuries each month, pushing its balance sheet almost to $4 trillion, according to a Bloomberg survey.

Forty-eight of 49 economists polled predict the FOMC will purchase the securities to bolster an existing program to buy $40 billion in mortgage bonds each month. Policy makers pledged in October to continue that plan until the labor market improves “substantially.”

A program known as Operation Twist, in which the Fed sells shorter-maturity Treasuries and buys longer-dated debt, is due to expire at the end of the month. As part of the plan, the central bank purchased $1.4 billion of Treasury Inflation Protected Securities today maturing from January 2021 to February 2042.

Treasuries fell earlier as the ZEW Center for European Economic Research said its index of German investor and analyst expectations, which is designed to predict economic developments six months in advance, climbed to 6.9 this month from minus 15.7 in November.

Bondholders tendered Greek bonds with a face value of more than 31 billion euros ($40 billion), a Finance Ministry official said. The official asked not to be identified because he isn’t authorized to speak publicly.

The U.S. faces a fiscal cliff of $607 billion in automatic spending cuts and tax increases starting Jan. 1 if lawmakers can’t reach agreement. The Congressional Budget Office has said the stalemate probably would lead to a recession in the first half of 2013.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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