Treasuries Drop Before $13 Billion Auction After Moody’s Warning

Treasuries fell before a $13 billion sale of 30-year debt, a day after Moody’s Investors Service said it may cut the Aaa credit rating held by the U.S. amid debt-ceiling negotiations in Congress.

U.S. bonds extended losses after initial claims for jobless benefits fell last week to the lowest since April while retail sales rose. Federal Reserve Chairman Ben S. Bernanke said the central bank won’t immediately begin a third round of bond-buying, known as quantitative easing, to stimulate economic growth. Three- and one-month bill rates fell below zero.

“It’s a pretty modest reaction to a serious warning coming from a U.S. ratings agency,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 20 primary dealers that trade with the Fed. “Not only are there issues with the debt-ceiling limit, but there are also clearly fiscal issues in the U.S. The perception is that there is demand lined up for the bond today, but it could also be very tricky.”

Thirty-year yields increased three basis points, or 0.03 percentage point, to 4.20 percent at 12:42 p.m. in New York, according to Bloomberg Bond Trader prices. The 4.375 percent security due May 2041 dropped 15/32, or $4.69 per $1,000 face amount, to 102 31/32.

Benchmark 10-year note yields were two basis points higher at 2.91 percent. Rates on U.S. one- and three-month bills were negative for a second day, the one-month reaching negative 0.0101 percent and the three-month at negative 0.0051 percent.

‘Cut Bill Supply’

“The concern with the debt ceiling is that if the Treasury needs to cut back issuance, they would cut bill supply first,” said Christopher Bury, co-head of fixed-income rates at the primary dealer Jefferies & Co. in New York. “The bigger story in the front end is the money-fund community is starved for yield, and there’s been essentially more demand than supply.”

Yields on 30-year bonds rose from a seven-month low of 4.12 percent reached on July 12 as Commerce Department data showed sales at U.S. retailers rose 0.1 percent in June, compared with the median forecast of a 0.1 percent drop in a Bloomberg survey.

Applications for jobless benefits dropped 22,000 in the week ended July 9 to 405,000, Labor Department data showed. Economists forecast 415,000 claims, according to the median estimate in a Bloomberg News survey. The Producer Price Index fell 0.4 percent in June, another department report showed.

‘Nebulous Area’

“It’s going to leave us in a nebulous area,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA Inc., a primary dealer. “The labor market isn’t as weak as we thought it was, although it’s still weak. Retail sales are on the weakish side, and PPI is mixed.”

Treasuries pared losses yesterday after the U.S., rated Aaa by Moody’s since 1917, was put on review for the first time since 1996. The move was prompted by concern officials won’t raise the debt limit in time to prevent a missed payment, Moody’s said in a statement. The rating would probably be reduced to the Aa range, the company said.

Obama may summon congressional leaders to a Camp David summit this weekend after the latest round of White House negotiations on the budget deficit and debt limit ended on a tense note. The president walked out of yesterday’s White House meeting with legislative leaders on the deficit, House Majority Leader Eric Cantor told reporters.

The Treasury has said it has until Aug. 2 before its ability to pay the debt expires.

Fed Chairman Bernanke told the Senate Banking Committee today a loss of investor confidence could complicate the rollover of the U.S. government’s debt.

‘Loss of Confidence’

“It is entirely possible that loss of confidence or political risk could raise interest rates and make it more difficult or expensive to roll over the debt,” Bernanke said in comments today to the Senate Banking Committee.

He told the House Financial Services Committee yesterday that failure to raise the debt limit would lead to a “huge financial calamity” that could add to unemployment.

Bernanke said today he’s not prepared to take immediate action to stimulate the economy. He said inflation now is “higher” and “closer” to the central bank’s informal target than was the case in August, and that’s one reason why the Fed won’t immediately embark on a third round of bond purchases. Its second round of quantitative easing, $600 billion of Treasury acquisitions, ended on scheduled June 30.

The central bank must “keep all options on the table” to stimulate the economy if necessary, Bernanke told the house panel yesterday.

Bernanke Options

One option, he said yesterday, would be a third round of government bond purchases. Another would be to pledge to hold rates at record lows and the Fed’s balance sheet at a record high of almost $3 trillion for a longer period of time. The central bank also could reduce the interest rate it pays banks on excess reserves parked at the central bank.

The 30-year bonds being sold today yielded 4.21 percent in pre-auction trading, versus 4.238 percent at the last sale of the securities on June 9.

Investors bid for 2.63 times the amount of debt offered last month. The 10-sale average is 2.64. Indirect bidders, the investor group that includes foreign central banks, bought 38.4 percent of the securities, compared with the 10-auction average of 39.7 percent.

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