Treasuries Rise on Europe, Notes May Sell at Record Yield

Treasuries rose, with 10-year notes snapping a three-day decline, before European leaders meet for a summit in Brussels to address the region’s debt crisis.

Five-year note yields traded almost the lowest levels since February as the U.S. prepares to sell $35 billion of the securities at what may be a record low auction yield, after demand approached the most ever at a two-year note sale yesterday. The Federal Reserve purchased $1.8 billion of securities in the first of two operations of up to $7 billion.

“There’s a pulling back of expectations that we will see anything useful out of the European leaders summit this afternoon,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “There’s a general shifting back to a bit of a risk-off mode. Given the global demand for Treasuries, we anticipate strong non-dealer sponsorship at the auction.”

The benchmark 10-year yield fell five basis points, or 0.05 percentage point, to 1.72 percent at 11:08 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 rose 15/32, or $4.69 per $1,000 face amount, to 100 9/32. The yield dropped as low as 1.71 percent, approaching the record 1.67 percent set on Sept. 23.

Thirty-year bonds rose as much as one point, pushing yields down seven basis points to 2.80 percent.

Technical Levels

The “level to watch” on the 10-year note yield would be the record low, Tom Fitzpatrick and Shyam Devani, technical strategists at Citigroup Global Markets, 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.”

The yield on the five-year note fell two basis points to 0.73 percent. It touched 0.7032 percent on May 15, the lowest since Feb. 3.

Treasuries have returned 0.8 percent this month, and 8.7 percent over the past year, according to indexes compiled by Bank of America Merrill Lynch.

The five-year notes being sold today yielded 0.76 percent in pre-auction trading, poised to break the all-time auction low of 0.88 percent set in December.

Investors bid for 3.09 times the amount offered at the previous sale of the securities April 25, versus the average of 2.93 for the past 10 auctions.

“There’s cash on the sidelines and the five-year is a good place to invest it,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York.

Auction Bids

At yesterday’s $35 billion two-year sale, investors bid for 3.95 times the amount of securities available, the most since the record high of 4.07 in November.

The government is scheduled to conclude this week’s auctions with $29 billion of seven-year securities tomorrow.

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.

Record Yields

German 10-year bond yields dropped to a record low 1.395 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 yield on 10-year gilts dropped as much as nine basis points, or 0.09 percentage point, to a record 1.779 percent. The yield on the nation’s two-year notes fell to an all-time low of 0.248 percent and five-year rates slid to 0.752 percent.

The Stoxx Europe 600 Index declined 1.6 percent, and the euro dropped as low as $1.2615, the weakest since August 2010. Yields on German five- and 30-year bunds fell to records amid deepening concern Greece will exit the euro.

“Everybody is in a wait-and-see mode to see what happens with the euro,” Franzese of Wunderlich said.

The Fed purchased 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 plans to purchase as much as $5 billion of securities maturing from May 2018 to May 2020 in its second operation scheduled for 2 p.m. 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.

Demand for new U.S. homes increased more than forecast in April as low prices and mortgage interest rates drew buyers. Purchases rose to a 343,000 annual rate, up 3.3 percent from a revised 332,000 in March, the Commerce Department reported today in Washington. The median forecast in a Bloomberg News survey of economists was 335,000.

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