Treasuries Fall on Greek Aid; Schwab Favors Corporates

Treasuries declined for a third day as the approval of a bailout package for Greece by European leaders reduced refuge demand at the U.S. government’s auction of $35 billion in two-year notes.

The notes yielded 0.310 percent, matching pre-auction trading and compared with 0.25 percent at the previous sale on Jan. 24. Yields on 10-year debt reached the highest level in a month while they are still more than a percentage point below their five-year average on speculation the Federal Reserve will maintain efforts to stimulate the economy. The central bank sold $8.6 billion of notes today as part of its program to shift its holdings to longer-maturity Treasuries.

“It was an on-the-screws auction with muted response so far,” said Russ Certo, managing director of rates trading at Gleacher & Co. in New York. “This was a winner for the dealers because we took down the supply pretty much at the lows for the day.”

Yields on current two-year notes rose one basis point, or 0.01 percentage point, to 0.30 percent at 5:01 p.m. New York time, according to Bloomberg Bond Trader prices. The 0.25 percent securities maturing in January 2014 was unchanged at 99 29/32.

Benchmark 10-year note yields rose six basis points to 2.06 percent. They touched 2.08 percent, the most since Jan. 24, compared with a five-year average of 3.41 percent.

Inflation Measure

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a reflection of traders’ outlook for inflation known as the break-even rate, reached 2.31 percentage points, the highest since August.

The two-year note auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.54, compared with an average of the past 10 auctions of 3.49 percent.

Two-year notes have lost 0.1 percent this year, compared with the 0.5 percent decline for the broader Treasury market, according to Bank of America Merrill Lynch indexes. The two-year securities returned 1.5 percent in 2011.

Indirect bidders, a class of investors that includes foreign central banks, bought 35.8 percent of the notes at the sale after purchasing 32.9 percent in January. The average for the past 10 offerings is 32.3 percent.

Bid Details

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 9.5 percent of the notes at the sale, compared with an average of 13.7.

Primary dealers held $65.27 billion of U.S. coupon securities of as long as three years in maturity as of Feb. 8, the most ever, according to Fed data. The amount helped to push aggregate dealer holdings of Treasuries to a record high of $106 billion during the same period.

“It’s a big supply week,” Gleacher’s Certo said. “There’s a lot of Treasury bill supply and auction supply in the U.S.”

Today’s offering is the first of three note auctions this week totaling $99 billion. The Treasury will sell $35 billion in five-year debt tomorrow and $29 billion in seven-year securities on Feb. 23.

This week’s note auctions and last week’s sale of $9 billion of 30-year Treasury Inflation Protected Securities will raise $47.8 billion of new cash as maturing securities held by the public total $60.2 billion.

Investors in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest interdealer broker, maintained their bearish stance on Treasuries. Ried’s index on the outlook through June slid to 43 for the seven days ended Feb. 17 from 44 the previous week. A figure below 50 shows investors expect U.S. government debt to drop.

Fed Moves

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.

The U.S. central bank sold securities due from December 2012 to May 2013 today under the program, according to the New York Fed’s website. Fed Chairman Ben S. Bernanke has pledged to keep the target for overnight lending between banks at virtually zero until at least late 2014.

Euro-area finance ministers meeting in Brussels awarded 130 billion euros ($172 billion) in aid to Greece. The plan includes a 53.5 percent writedown for investors in the nation’s bonds, Luxembourg Prime Minister Jean-Claude Juncker told reporters.

Officials also held out the prospect of boosting the backstop for future fiscal emergencies to 750 billion euros from a planned limit of 500 billion euros when a permanent aid fund is paired with the temporary fund starting in July. A summit on March 1-2 may deliver a “significant reinforcement of the euro-area firewall,” Juncker said.

“It’s a little bit of a selloff with some optimism over Europe maybe working its way out,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of primary dealers that are required to bid at the auctions. “It’s clearly not an endgame, they’re still going to be dragging this thing out instead of there being some definitive end to the crisis.”

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