Treasuries Gain as Sale Yield Drops to Record on Europe Concern

Treasury 30-year bonds rallied the most in a month as concern Europe’s debt crisis will worsen pushed yields at the U.S. government’s $13 billion auction of the securities to a record low.

The bonds were sold at a yield of 2.925 percent and the offering’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.05, the highest level since August 2000. Yields on U.S. government debt due in seven years and longer dropped to the lowest levels in more than two weeks as stocks fell and the euro slid below $1.30 for the first time since January.

“It’s been a bit of a flight to quality driven by the meltdown in the equity markets,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “As the euro comes off even further, we are reminded of the risk to global growth coming out of the region.”

The yield on the current 30-year bond tumbled 11 basis points, or 0.11 percentage point, to 2.90 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 2.89 percent, the lowest level since Nov. 25. The 3.125 percent securities due in November 2041 climbed 2 6/32, or $21.88 per $1,000 face amount, to 104 13/32.

Ten-year yields dropped six basis points to 1.90 percent and touched 1.89 percent, the least since Nov. 25. Yields on seven-year notes reached 1.36 percent, the lowest since Nov. 23.

The Standard & Poor’s 500 Index fell 1.1 percent.

Yield Curve

The gap between yields on two-year notes and the 30-year bonds, known as the yield curve, narrowed to 2.66 percentage points, the least since Nov. 28, in its third daily decrease.

The curve has been flattening as the Federal Reserve has bought longer-dated Treasury securities in a program to reduce long-term interest rates, and as investors have sought safety amid the European debt crisis.

Today’s offering was the third auction of coupon-bearing debt this week to attract stronger-than-forecast demand. The $21 billion sale of 10-year notes yesterday had a bid-to-cover ratio of 3.53, the highest since April 2010. The government’s $32 billion sale of three-year notes on Dec. 12 attracted a bid-to-cover ratio of 3.62, a record for the maturity.

“It’s been a very good auction week,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, which as one of the Fed’s 21 primary dealers is obliged to bid in U.S. debt sales. “We have definitely seen strong demand for Treasuries still as we have continued angst over Europe and continued lack of what could be considered safe assets.”

Treasuries have returned 9.4 percent this year, headed for the biggest gain in a year since 2008.

Euro Slides

The euro dropped to as low as $1.2946 today, the weakest level since Jan. 11, as global investors fled euro-denominated assets on concern their value will drop.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, reached 1.47 percentage points below the euro interbank offer rate, the most expensive on an intraday basis since Nov. 30.

“Concern about Europe is still at the forefront,” said Ray Remy, head of fixed income in New York at the primary dealer Daiwa Capital Markets America Inc. “We still have tremendous problems in Europe. I wouldn’t be surprised to see Treasuries rally to 1.75 percent over the next five weeks.”

U.S. interest-rate swap spreads, a measure of stress in credit markets, increased for a fourth day, the longest stretch in two months. The difference between the two-year swap rate and the comparable-maturity Treasury note yield expanded as much as 3.6 basis points to 49.50 basis points, the widest since Nov. 30 on an intraday basis, according to data compiled by Bloomberg.

Indirect Bidders

At today’s auction, indirect bidders, an investor class that includes foreign central banks, purchased 32.5 percent of the securities, compared with 28.4 percent at the November sale and an average 34.9 percent at the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 21.2 percent, versus an average of 14.7 percent for the past 10 auctions.

Yields at 30-year bond sales reached their previous low of 3.12 percent at the October offering. The average forecast for today’s auction in a Bloomberg survey of seven primary dealers was for a yield of 2.976 percent.

The $66 billion of nominal-Treasury auctions this week represents new cash of more than $39 billion, according to data compiled by Bloomberg. More than $26 billion of the maturing debt is publicly held.

The Treasury will auction $12 billion of five-year Treasury Inflation Protected Securities tomorrow, when it also will announce the sizes of three note offerings next week.

The Fed sold $8.63 billion of Treasuries today maturing from October 2012 to May 2013 as part of its program to replace $400 billion of short-term debt in its portfolio with longer-maturity securities in an effort to cut borrowing costs.

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