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Treasuries Rise on Europe, U.S. Sells Notes at Record

Treasuries rose, pushing the yield on the 10-year note to almost record lows, as concern mounted that a possible Greece exit from the euro may worsen the region’s debt crisis, boosting haven demand for U.S. government debt.

Treasuries remained higher after a $35 billion sale of five-year notes drew a record-low auction yield of 0.748 percent, compared with the previous record low of 0.88 percent in December. The U.S. will sell seven-year debt tomorrow, the final of three note sales totaling $99 billion. The Federal Reserve purchased $6.5 billion of securities in two operations as part of a program to lower borrowing costs.

“Everything is being driven by the flight-to-quality bid that’s being generated out of the fear and uncertainty around Europe,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “It’s pushing people into the safest and most liquid assets.”

The benchmark 10-year yield fell three basis points, or 0.03 percentage point, to 1.74 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 rose 10/32, or $3.13 per $1,000 face amount, to 100 1/8.

Current five-year note yields fell two basis points to 0.73 percent, while 30-year bond yields eased five basis points to 2.82 percent.

Auction Statistics

The auction yield matched the average forecast in a Bloomberg News survey of nine of the Federal Reserve’s primary dealers. Indirect bidders, an investor class that includes foreign central banks, purchased 42.6 percent of the notes, compared with an average of 44.4 percent for the past 10 sales.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.99, versus an average of 2.93 for the previous 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 6.5 percent of the notes, compared with an average of 12 percent at the last 10 auctions.

“The market rallied all the way into the auction, there was no concession, and a lot of people were forced to buy ahead of the auction so the auction results were a little soft,” said John Briggs, a U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, a primary dealer. “With 10-year yields so close to historical lows and the market being held here due to uncertainty in Europe, if you don’t have to trade right here, you don’t trade. You preserve capital for better opportunities one way or the other.”

Debt Returns

Five-year notes have gained 1.02 percent this year, matching the gain for the broader Treasury market, according to Bank of America Merrill Lynch indexes.

This week’s note offerings, combined with the May 17 auction of $13 billion in 10-year Treasury Inflation Protected Securities, will raise $52.9 billion of new cash, as maturing securities held by the public total $59.1 billion.

Treasuries rose earlier as European leaders prepared to meet for a summit in Brussels to address the region’s debt crisis. The 10-year note yield dropped as low as 1.71 percent, approaching the record 1.67 percent set on Sept. 23.

The “level to watch” on the 10-year note yield would be the record low, Tom Fitzpatrick and Shyam Devani, technical strategists at Citigroup Inc., wrote in a research note. “A breach of that would be a real concern as it would open the way for the 1.2 percent area.”

German Sale

Refuge from the region’s crisis also drove investor demand at an auction in Germany, which received bids for more than the maximum 5 billion-euro ($6.3 billion) target at a note sale, with the yield falling to a record.

Germany, the only country in the euro area with a stable outlook on its AAA rating, sold 4.56 billion euros of two-year securities carrying a zero-percent coupon for the first time, Bundesbank data showed today. The securities were sold to yield 0.07 percent. The country offered a fixed interest payment of 0.25 percent when selling similar-maturity notes on April 18.

German 10-year bond yields dropped to a record-low 1.376 percent.

U.K. government yields on two-, five- and 10-year notes declined to record lows, after Bank of England minutes showed the decision to pause stimulus was a “finely balanced” one for some policy makers.

The Fed purchased $1.8 billion of Treasuries due from August 2022 to May 2030 in its first operation today, according to the Fed Bank of New York’s website. The central bank also purchased $4.7 billion of securities maturing from May 2018 to May 2020 in its second operation as part of a program to replace $400 billion of shorter-term debt in its holdings with longer maturities to support the economy by keeping down borrowing costs.

The 10-year rate will be 2.45 percent by year-end, a Bloomberg survey of banks and securities companies shows, with the most recent forecasts given the heaviest weighting.

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