Treasuries Decline on Greek Debt Talks, Three-Year Note Auction

Treasuries fell as speculation Greece is closer to receiving international funding reduced the haven appeal of government securities as the U.S. sold $32 billion of three-year notes.

U.S. 10-year yield reached almost a two-week high after reports that Greek officials are working on the final draft of the document listing the budget and structural measures. The three-year securities drew a yield of 0.347 percent, compared with a forecast of 0.346 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers, which purchased the largest share of the sale since 2009.

“Better sentiment around Greece and soft performance from the three-year note auction has caused the market to dip,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in Fixed income assets. “The cheapening we’ve seen should allow for better auctions for the rest of the week. And no one is going to completely believe the European situation is fixed until they see it on paper.”

The yield on the current three-year note rose three basis points, or 0.03 percentage point, to 0.34 percent at 5:11 p.m. in New York, according to Bloomberg Bond Trader Prices.

The yield on the benchmark 10-year note increased seven basis points to 1.97 percent, after touching the highest since Jan. 25. The 2 percent securities maturing in November 2021 fell 19/32, or $5.94 per $1,000 face amount, to 100 7/32.

Auction Details

The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 3.30, versus an average of 3.35 for the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 27.7 percent of the notes, the least since February 2011 and compared with an average of 37.4 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.5 percent of the notes at the sale, versus an average of 11.2 percent for the past 10 auctions.

Primary dealers bought 63.8 percent of the offering, the largest proportion since January 2009.

“Some of the foreign and domestic buy-side demand did not materialize as expected,” said Anthony Cronin, a trader at Societe Generale SA in New York, one of the primary dealers that are required to bid at Treasury auctions.

Dealer Holdings

The 21 firms that act as the central bank’s counterparties in open market transactions held $8.2 billion of notes with maturities of between three and six years as of Jan. 25, up from a $6.1 billion bet against the securities as of Jan. 18, Fed data show. The dealers held $53.4 billion of notes due in three years or less, up $13.1 billion in the same period, the data show.

The Treasury is selling $24 billion of 10-year debt tomorrow and $16 billion of 30-year bonds on Feb. 9. This week’s auctions will raise $22.4 billion of new cash as maturing securities held by the public total $49.6 billion.

The amount of marketable securities outstanding rose to $10.07 trillion as of Jan. 31, up from $9.94 trillion at the end of last year.

Three-year notes have returned 0.18 percent this year, compared with a loss of 0.05 percent for Treasuries overall, according to Bank of America Merrill Lynch indexes.

Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed yesterday at 72.3, at almost the lowest since July 2007 and less than the five-year average of 111.8.

Trading Levels

Treasury market volume dropped yesterday to the lowest since Jan. 9. About $176 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, below the one-year average of $277 billion.

Greek officials are working on the document required to receive international funding, a government official said. The official, who declined to be named, said the document would be discussed by political party leaders supporting the government of interim Prime Minister Lucas Papademos at a meeting later in the day. The official spoke to reporters in Athens.

“Maybe things are getting slightly better in Europe,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets Americas Inc., a primary dealer. “Rates started to move slightly higher.”

Jobs Data

U.S. government bonds tumbled on Feb. 3, pushing yields up 10 basis points, after the Labor Department said employers added 243,000 jobs in January. The median forecast of economists in a Bloomberg News survey was 140,000. The jobless rate fell to 8.3 percent, the least in three years.

Fed Chairman Ben S. Bernanke repeated today that the job market is still far from healthy after signs of economic improvement over the past year, and he called on lawmakers to reduce the long-term budget deficit.

“We still have a long way to go before the labor market can be said to be operating normally,” Bernanke said in testimony prepared for the Senate Budget Committee that is identical to remarks he gave on Feb. 2 to the House Budget panel.

Bernanke said after a two-day policy meeting Jan. 24-25 that the central bank is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.

The central bank sold $1.3 billion of Treasury Inflation Protected Securities, or TIPS, maturing from July 2012 to January 2015 today under a program known as ‘Operation Twist,’ according to the New York Fed’s website.

The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs and spur the economy under a program it plans to conclude in June.

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