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Treasuries Surge as 10-Year Note Sale Draws Record Low Yield

Treasuries Extend Gains After $24 Billion Sale
Traders react following a Federal Open Market Committee (FOMC) decision to keep benchmark interest rates close to zero in the Eurodollar Options trading pit at the Chicago Board of Trade (CBOT) on Aug. 10, 2010. Photographer: John Zich/Bloomberg

Treasuries rallied as a $24 billion 10-year note sale drew higher-than-average demand and a record low yield in the first offering of the maturity following Standard & Poor’s downgrade of U.S. credit Aug. 5.

U.S. 10-year yields fell for a third straight day after the Federal Reserve offered yesterday a dimmer view of the economy than it did in June. The extra yield Treasury investors get to hold 10-year notes instead of two-year debt was the narrowest in more than two years on investor concern the European debt crisis would worsen. Stocks slumped, erasing yesterday’s gains.

“There was very good demand for Treasuries at the auction, especially for direct bidders,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 20 primary dealers that are obligated to bid at Treasury auctions. “The reality is there is still tons of weakness in risky assets, the economy and Europe. As such, the only place to go is Treasuries, regardless of the country’s credit rating. The curve should continue to flatten from here.”

The yield on the current 10-year note fell 14 basis points, or 0.14 percentage point, to 2.11 percent at 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 rose 1 10/32, or $15 per $1,000 face amount, to 108 30/32.

Thirty-year bond yields fell 10 basis points to 3.52 percent. One month-bill rates touched negative 0.005 percent.

The Standard & Poor’s 500 Index sank 4.4 percent following its biggest jump in more than two years yesterday, when it rebounded from its worst loss since 2008.

Records Fall

The difference in yield between two- and 10-year Treasuries was 1.92 percentage points, touching the least since April 2009. A narrower yield difference, or flatter curve, indicates investors are betting on lower growth and inflation. The difference widens as investors demand higher compensation to buy longer-term securities on concern the economy may strengthen, spurring inflation.

The 10-year note auction drew a yield of 2.140 percent, below the previous record of 2.419 percent in January 2009, and compared with the average forecast of 2.199 percent in a Bloomberg News survey of nine of the Federal Reserve’s 20 primary dealers.

Indirect bidders, an investor class that includes foreign central banks, purchased 35.4 percent of the notes, compared with an average of 50.3 percent for the past 10 sales. They bought 42 percent at the July auction.

Bidding Pattern

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 31.7 percent of the notes, the most since data began in 2003, and compared with 13.9 percent in July and the 10-auction average of 8.3 percent.

The bid-to-cover ratio, a gauge of demand which compares total bids with the amount of securities offered, was 3.22, versus an average of 3.11 at the previous 10 sales and 3.17 at the last offering.

The U.S. yesterday sold $32 billion of three-year notes at a record-low yield of 0.5 percent. The government will auction $16 billion of 30-year bonds tomorrow.

The 10-year note yield reached a record low of 2.0346 percent yesterday after the Fed said risks to economic growth had increased and that it would hold its target overnight rate for loans between banks at zero to 0.25 percent for the next two years.

FOMC Options

The Federal Open Market Committee discussed a range of policy tools to bolster the economy and said it’s “prepared to employ these tools as appropriate.”

“We are seeing a yield grab,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “By locking the front end of the curve for two years, the Fed wants to push investors further out the curve and push them into risk, and that is what we are seeing.”

Treasuries have returned 2.6 percent so far this month, and are up 6.9 percent for the year, Bank of America Merrill Lynch indexes show. The 10-year note has returned 5.4 percent so far in August and has gained 12 percent in 2011.

The Treasury 10-year yield was 2.95 percent on July 28, the day before the Commerce Department said the economy grew at a 1.3 percent annual rate last quarter, following a 0.4 percent gain in the first quarter that was less than previously estimated. The median forecast of economists surveyed by Bloomberg News was for a 1.8 percent increase.

“Until we have some resolution in stocks or some notion that Europe is contained there will be very limited room for Treasuries to sell off,” said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies Group Inc., a 20 primary dealer. “We are grinding lower and lower in yields, and the inevitable questions arise about are we Japan and if the yield curve should be this flat.”

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