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Treasuries Gain as 10-Year Note Attracts Most Demand Since March

Treasuries rose as yields at almost two-year highs pushed demand at the government’s auction of $21 billion in 10-year notes to the highest level since March, even with the Federal Reserve considering slowing bond purchases.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount sold, was 2.86, versus 2.45 at the last sale and an average of 2.73 at the past 10. The securities yielded 2.946 percent, below a forecast of 2.964 percent in a Bloomberg News poll of eight of the Fed’s 21 primary dealers. Treasuries rose earlier amid bets Verizon Communications Inc.’s sale of a record $49 billion in corporate bonds would lead to the unwinding of hedges used to guard against higher yields.

“While people were concerned about the potential for Treasury supply to be crowded out from the Verizon deal, that turned out to clearly not be what transpired,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “As 10-year yields get closer to 3 percent, the highest-yielding auction in a while proved an attractive buying opportunity.”

The yield on the benchmark 10-year note slid five basis points, or 0.05 percentage point, to 2.91 percent at 5 p.m. in New York trading, according to Bloomberg Bond Trader prices. It climbed on Sept. 6 to 3.005 percent, the highest since July 2011, versus an average of 2.16 percent this year. The price of the 2.5 percent security due in August 2023 gained 14/32, or $4.38 per $1,000 face amount, to 96 15/32.

Thirty-year (USGG30YR) bond yields decreased four basis points to 3.85 percent. They reached a two-year high of 3.94 percent Aug. 22.

Volatility Drops

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index dropped to 98, the first time it’s been below 100 this month. It climbed on Sept. 5 to 114.19, a two-month high. The 2013 average is 71.15.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased 19 percent to $417 billion. The figure is down from a 2013 high of $662 billion on May 22 and up from a low of $148 billion on Aug. 9. The 2013 average is $315 billion.

Yields climbed from 2013 lows of 1.61 percent for 10-year notes and 2.81 percent for long bonds, both reached on May 1, amid speculation the Fed will begin to reduce its $85 billion-a-month bond-buying program at a meeting Sept. 17-18.

Policy makers will consider whether the U.S. economy has improved enough to start slowing the monthly purchases of Treasuries and mortgage bonds designed to push down borrowing costs and spur the economy.

Treasuries snapped their declines after a report on Sept. 6 showing the U.S. added fewer-than-forecast workers in August fueled bets the central bank will slow stimulus less aggressively than previously anticipated.

Bidder Participation

The yield at today’s auction was the highest since the June 2011 sale of 10-year notes.

Indirect bidders, an investor class that includes foreign central banks, purchased 36.6 percent of the notes, compared with an average of 37.6 percent at the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 29.6 percent, versus an average of 21.5 percent at the past 10 auctions.

“It’s an impressive auction,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “With all the supply in the market in general, the market absorbed this in addition to all the hedges for the Verizon deal. The expectation was for this auction to be a little softer than it was.”

Three Auctions

The offering was the second of three auctions this week as the government sells $65 billion of notes and bonds. The U.S. sold $31 billion of three-year debt yesterday at a yield of 0.913 percent, the highest level since May 2011, and will auction $13 billion of 30-year bonds tomorrow.

Investors bid $2.88 for each dollar of the $1.495 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.

Verizon, the second-biggest U.S. telephone carrier, sold bonds in an eight-part offering that’s the biggest company debt offering ever.

The second-largest U.S. telephone carrier issued fixed-rate debt with maturities ranging from three to 30 years as well as two portions of floating-rate securities, according to data compiled by Bloomberg.

The offering will help fund Verizon’s buyout of Vodafone Group Plc’s 45 percent stake in Verizon Wireless, the largest and most profitable U.S. wireless carrier.

As companies sell debt, they enter into so-called rate lock agreements, in which they bet on Treasury prices falling to guard against higher yields. Once the debt is sold, the wagers are ended.

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