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Treasuries Rise as European Crisis, U.S. Impasse Buoy Auction

Treasuries rallied after the government’s sale of $35 billion in two-year notes attracted the highest demand ever as investors sought safety amid the European debt crisis and U.S. budget gridlock.

Ten-year note yields traded at almost six-week lows as U.S. lawmakers said failed to agree on spending cuts to address budget deficits. Stocks fell and government bonds from Spain and Italy declined amid concern the region’s leaders will struggle to fix the debt crisis, as the Federal Reserve and the Treasury sold $108 billion in debt today.

“There’s demand out there,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We are in an environment of government not doing what they are supposed to do based on what’s going on in Europe and here.”

The yield on the current two-year note fell two basis points, or 0.02 percentage point, to 0.26 percent, at 5:14 p.m. in New York, according to BGCantor Market Data. The 0.25 percent securities maturing October 2013 rose 1/32, or 31 cents per $1,000 face amount, to 99 31/32. The yield on the benchmark 10-year note fell six basis points to 1.96 percent.

Sales Totals

The Treasury and the Fed today sold government debt amid a scarcity of short-term securities as Europe’s crisis intensifies and the U.S. shifts to issuing longer-term debt to manage interest costs.

A special debt-reduction committee in the U.S. Congress failed to reach agreement, extending partisan gridlock into the 2012 election year and setting the stage for $1.2 trillion in automatic spending cuts.

“After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline,” said panel co-chairmen Representative Jeb Hensarling of Texas and Senator Patty Murray of Washington.

“Supply has never been a problem when the markets are in turmoil,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “There doesn’t seem to be any concrete solutions in Europe.”

Today’s two-year note sale drew a yield of 0.280 percent, compared with a forecast of 0.287 percent in a Bloomberg News survey of seven of the Fed’s primary dealers.

Big Bids

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 4.07, compared with an average of 3.32 for the previous 10 sales. It was the highest on record for a fixed-coupon Treasury note or bond, surpassing the previous high of 3.97 of $18 billion two-year notes in August 2007, at the start of the financial crisis, Treasury data show.

Indirect bidders, an investor class that includes foreign central banks, purchased 42.2 percent of the notes, compared with an average of 31.8 percent for the past 10 sales. Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 11.2 percent of the notes, compared with an average of 13.7 percent at the last 10 auctions.

The Treasury also sold $29 billion in three-month bills at a rate of 0.015 percent and $27 billion in six-month bills at a rate of 0.050 percent.

The Fed sold $8.531 billion of securities maturing in February 2012 through July 2012 as part of its plan to lower borrowing costs that’s become known as Operation Twist, according to the Federal Reserve Bank of New York’s website. The central bank also sold $8.63 billion in Treasuries maturing from March 2014 to November 2014, in a second operation today.

Sales Schedule

The Treasury will sell $35 billion of five-year debt tomorrow and $29 billion of seven-year securities on Nov. 23. This week’s auctions raise $52.6 billion of new cash.

The difference between the yields on two- and 10-year notes narrowed to 1.68 percentage points. It touched 1.67 percentage points, the lowest since Oct. 6. The spread between the yields on the two- and 30-year securities narrowed to 2.65 percentage points, the least since Oct. 5.

The Standard & Poor’s 500 Index fell 2 percent. Spain’s 10-year bond yield rose 17 basis points to 6.55 percent and Italy’s advanced three basis points to 6.67 percent.

“Spreads are under a lot of pressure,” said Dan Mulholland, a Treasury trader in New York at RBC Capital Markets LLC, the investment-banking arm of Canada’s biggest bank, one of 21 primary dealers that trade Treasuries with the Federal Reserve. “You’ll see more of a flight to quality.”

Treasuries have returned 8.9 percent this year, the most since 14 percent in 2008 during the financial crisis, according to Bank of America Merrill Lynch data.

Download: BlackRock's Pellicciaro Discusses Treasuries


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