Treasuries Remain Higher After U.S. $13 Billion Long-Bond

Treasury 30-year bond yields climbed from the lowest level in more than a week as the U.S. auctioned $13 billion of the securities before the Federal Reserve discusses its debt purchases at a meeting next week.

The long-bond sale drew a bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, of 2.4, versus 2.11 at the August sale. Treasuries rose earlier as investors weighed prospects for Fed stimulus and economic data from Europe and Japan damped growth optimism. U.S. retail sales increased last month, according to a Bloomberg News survey of economists before a government report tomorrow.

“It was a good auction,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “There’s a lot of money on the sidelines. The Fed may not be as aggressive in tapering as the market thought they were going to be.”

The yield on the benchmark 30-year bond fell one basis point or 0.01 percentage point, to 3.85 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 3.625 percent security due in August 2043 gained 1/32, or 31 cents per $1,000 face amount, to 95 31/32.

The yield earlier dropped to 3.81 percent, the least since Sept. 5. It climbed to 3.94 percent on Aug. 22, the highest since August 2011.

The 10-year note yield was little changed at 2.91 percent after touching 2.86 percent, the lowest since Sept. 4.

Trading Pace

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $349 billion. The 2013 average is $315 billion.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index dropped to 96.38, the lowest level since Aug. 27. It climbed on Sept. 5 to 114.19, a two-month high. The 2013 average is 71.36.

The securities at today’s auction yielded 3.820 percent, the most at a long-bond offering since July 2011. A Bloomberg survey of 11 of the Fed’s 21 primary dealers forecast a yield of 3.823 percent.

A $21 billion 10-year note offering yesterday was sold at 2.946 percent, the highest yield at an auction since June 2011 and attracted the most demand since March, even as Verizon Communications Inc. (VZ) sold a record $49 billion in bonds.

Indirect bidders, a class of investors that includes foreign central banks, bought 37.7 percent of the securities at today’s bond auction, the least since April, compared with a 38.6 percent average at the past 10 offerings.

Auction Demand

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 20.6 percent, the most since June 2012, versus the average 14.5 percent at the past 10 auctions.

Treasuries rose yesterday amid bets that Verizon’s debt sale would lead to the unwinding of hedges used to guard against higher yields. As companies sell debt, they enter into rate-lock agreements, in which they bet on Treasury prices falling to guard against higher yields. Once the debt is sold, they end the wagers.

“These are levels to buy rather than to sell,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The Verizon deal was a blowout. It emboldened people to think the worst is behind us so we are seeing better buying.”

This year’s auctions have seen a decline in average demand. Investors bid $2.88 for each dollar of the $1.508 trillion in U.S. government notes and bonds sold at auction in 2013, 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.

Bonds Returns

Thirty-year bonds have lost 15 percent this year, compared with a 3.9 percent drop in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes. Long bonds returned 2.5 percent in 2012, versus a 2.2 percent gain by Treasuries overall.

Today’s offering is the third of three U.S. note and bond auctions this week totaling $65 billion. The government sold $31 billion in three-year debt on Sept. 10 at a yield of 0.913 percent. Yesterday’s 10-year auction drew a yield of 2.946 percent and a bid-to-cover ratio of 2.86, compared with an average of 2.73 for the past 10 sales.

Yields declined earlier amid weaker-than-forecast global economic data. Factory production in the euro region fell 1.5 percent from June, when it gained 0.6 percent, the European Union’s statistics office said today. That’s more than the 0.3 percent contraction forecast by economists, according to the median of 33 estimates in a Bloomberg survey.

Japan Stalls

Japanese machinery orders were unchanged in July from the previous month when they fell 2.7 percent, the Cabinet Office said in Tokyo. Economists in a Bloomberg survey predicted an increase of 2.4 percent.

Treasury yields surged last month amid concern the Fed may slow its $85 billion in monthly bond purchases, a climb that ended after data on Sept. 6 showed lower-than-forecast job gains in August.

“The rise in yields was based on whatever tapering the Fed is going to do -- people feel we’ve priced that into the market,” Roth of Mitsubishi UFJ Securities said.

The Federal Open Market Committee will decide at its Sept. 17-18 meeting to reduce monthly purchases of Treasuries to $35 billion from $45 billion, according to the median of 34 responses in a Bloomberg survey of economists. Policy makers will maintain mortgage-bond buying at $40 billion under the central bank’s quantitative-easing program, the survey shows.

The U.S. budget deficit narrowed in August from a year earlier as a stronger job market boosted revenue, propelling the world’s largest economy toward its smallest annual shortfall since 2008.

Outlays exceeded receipts by $147.9 billion last month, compared with a $190.5 billion gap in August 2012, the Treasury Department said today in Washington. In the 11 months through the fiscal year that ends Sept. 30, the deficit was $755.3 billion, the narrowest for that period in five years.

To contact the reporters on this story: Susanne Walker in New York at swalker33@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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