Treasury 30-Year Bonds Break Six-Day Losing Streak Before Sale

U.S. 30-year bonds snapped their longest losing streak in more than four years as the U.S. prepared to sell $13 billion of the securities amid concern Europe’s debt crisis threatens the global economy.

Treasuries rose, pushing 10-year yields down from almost a six-week high, as Credit Suisse Group AG analysts said at least 66 of Europe’s biggest banks would fail a revised European Union stress test. Minutes of the Federal Reserve’s September meeting released yesterday showed some policy makers saw “considerable uncertainty” U.S. growth will pick up and wanted to keep bond purchases under quantitative easing as an option.

“The world is not a better place,” said Scott Graham, head of government bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago, one of the 22 primary dealers that trade with the Fed. “Europe is kicking tires of a possible solution, but we haven’t seen any credible package yet. The front end is getting a pop from what the Fed said yesterday with regard to the possibility of more quantitative easing.”

Yields on 30-year bonds dropped six basis points, or 0.6 percentage point, to 3.14 percent at 11:31 a.m. in New York, according to Bloomberg Bond Trader prices. Earlier they touched 3.11 percent. Long bonds had fallen for six days in the longest set of losses since May 2007. The price of the 3.75 percent securities maturing in August 2041 climbed 1 5/32, or $11.56 per $1,000 face amount, to 111 3/4.

Benchmark 10-year note yields fell six basis points to 2.15 percent. They rose yesterday to 2.27 percent, the highest level since Sept. 1. Three-year note yields decreased four basis points to 0.49 percent.

220 Billion Euros

The banks failing a revised EU stress test would need to raise about 220 billion euros ($302.3 billion) of capital, Credit Suisse analysts led by Carla Antunes-Silva wrote in a note to clients today. Eight banks out of the 90 tested failed the European Banking Authority’s July 15 stress test, with a combined capital shortfall of 2.5 billion euros.

The European Central Bank said involvement of private-sector banks in euro-area bailouts through enforced investor losses would risk financial stability.

“Stress in European banks is the main driver in the market,” said Carl Lantz, head of interest-rate strategy in New York at the primary dealer Credit Suisse. “It’s clear that the optimism was much too strong in the market. Any negative headlines can easily be a catalyst to lower rates, and that is what we are seeing.”

Treasuries pared gains after lawmakers in Slovakia approved an expansion of Europe’s bailout fund, completing ratification across the 17 euro countries as the region’s leaders prepare for a summit.

Treasury Auction

The 30-year U.S. bonds being sold today yielded 3.13 percent in pre-auction trading, beating the record low of 3.31 percent drawn at the last sale of the securities on Sept. 14.

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount sold, was 2.85 times last month, the highest level in an auction of the maturity since March. Indirect bidders, the category that includes foreign central banks, bought 39.4 percent of the securities, the highest level since April.

The Treasury sold $21 billion of 10-year securities yesterday, drawing the lowest bid-to-cover ratio since November 2010, 2.86. The government auctioned $32 billion of three-year notes on Oct. 11.

“Yields have pushed far enough up to bring in buyers in the wake of the 10-year auction yesterday,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The selling momentum seems to be getting tired without any material uptick in the economic outlook. Yields have backed up to a point that brings in buyer interest.”

‘Considerable Uncertainty’

Fed officials at their Sept. 20-21 meeting saw “considerable uncertainty” that U.S. economic growth will pick up, minutes showed. Policy makers decided at the gathering to replace through June $400 billion of Treasuries in the bank’s portfolio with longer-term debt to reduce borrowing costs in a program called Operation Twist after a similar effort in the 1960s. The Fed previously bought $2.35 trillion of assets in two rounds of quantitative easing to spur the economy.

The central bank bought $4.88 billion of Treasuries today maturing from October 2017 to August 2019 as part of the program, according to its website.

“The twist operation is in the driver’s seat today so far, so we should do better going into the operation,” said Sean Murphy, a trader at the primary dealer Societe Generale SA in New York. “The Fed leaving the door open for QE3 sort of set the stage for a bit of a rally as it brings potential for more buying into the market, which would sterilize operation twist.”

Treasuries have lost 1.3 percent this month after returning 5 percent in the third quarter, a Bank of America Merrill Lynch index shows. German bunds, perceived to be Europe’s safest government debt securities, have lost 1.6 percent in October after gaining 6.2 percent from July through September.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE