Treasuries Rise as Primary Dealers Reduce Offers to Fed

Treasury 30-year bonds rallied, leading gains among U.S. government debt, after Wall Street firms tendered fewer than average of the securities during today’s Federal Reserve Operation Twist purchase.

Primary dealers submitted offers equaling 2.32 times the $1.804 billion of securities bought by the Fed, down from an average ratio of 2.93 since the central bank began the program in October. Yields on benchmark 10-year notes touched the lowest in more than a month as investors speculated slowing employment growth will prompt the Fed to begin a third round of assets purchases, which has become known as quantitative easing.

“There was an aggressive buyback and there wasn’t a lot of submitted, and when there isn’t a big submission, the Fed is often forced to pay up for their securities, and its pushing the market higher,” said Scott Sherman, an interest-rate strategist in New York at Credit Suisse Group AG, one of the Fed’s 21 primary dealers that are required to submit offers. “The market is starting to view the possibility of QE3 or some further stimulus with increased probability.”

Yields on 30-year bonds fell four basis points, or 0.04 percentage point, to 2.62 percent at 5:02 p.m. New York time, according to Bloomberg Bond Trader data. The 3 percent security due May 2042 rose 28/32, or $8.75 per $1,000 face amount, to 107 26/32.

Ten-year note yields declined four basis points to 1.51 percent, the lowest level since June 5. The 10-year rate dropped 10 basis points last week. The all-time low yield was 1.44 percent set on June 1.

European Debt

Treasuries gains in European trading as Spanish and Italian debt fell amid concern euro-area finance ministers will fail to stem the region’s financial woes.

Spain’s 10-year bond yields climbed 11 basis points to 7.07 percent, while rates on similar-maturity Italian securities advanced nine basis points to 6.12 percent. The euro slid to as low as $1.2251, the weakest level since July 2010.

“Low-for-long lives on,” William O’Donnell, head U.S. government bond strategist at the Stamford, Connecticut-based RBS Securities primary dealer unit of Royal Bank of Scotland Group Plc., wrote in a note to clients. “The winds continue to blow favorably for Treasuries, and safe haven assets generally.”

After breaking below the 1.55 percent level, Treasury 10-year yields are poised to test 1.45 percent, O’Donnell wrote.

Fed Purchases

Federal Reserve Bank of Boston President Eric Rosengren, speaking at a conference in Bangkok earlier today, said a struggling U.S. labor market threatens to slow household spending. The unemployment rate has been more than 8 percent since February 2009. Rosengren do not vote on monetary policy this year.

The Fed bought $2.3 trillion of securities in two rounds of so-called quantitative easing, known as QE1 and QE2, from 2008 to 2011 to support the economy. In September it embarked on a plan to replace $400 billion of short-maturity Treasuries in its portfolio with longer-term debt to cap borrowing costs. It expanded the effort, known as Operation Twist, on June 20 by $267 billion and extended it until year-end.

Dealers submitted $4.185 billion of offers at today’s Fed purchase.

Average Offers

Wall Street’s primary dealers are increasingly choosing to hoard their U.S. bonds rather than sell them to the Fed.

Dealers offered an average of $7.2 billion in Treasuries a day to the central bank in June, down 40.5 percent from a high of $12.1 billion in October, data compiled by Bloomberg show.

The U.S. is scheduled to sell $32 billion of three-year notes tomorrow, $21 billion of 10-year securities the next day and $13 billion of 30-year bonds on July 12.

“The Street has given up on predicting what us going to happen in the short run with regards to Europe, and people are staying away from taking any large risks,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “Short-term trading in this market is very difficult as there aren’t many sellers. It would be nice to get price concession heading into the auctions, but it doesn’t look like we are going to get it.”

The government last week reported an 80,000 June jobs gain that fell short of the 100,000 increase projected by economists in a Bloomberg News survey.

“Failure to act aggressively now will lower the capacity of the economy for many years to come,” Federal Reserve Bank of Chicago President Charles Evans said at the same conference in Bangkok. “I support using our balance sheet to provide additional accommodation.”

The difference in yields between 10-year notes and TIPS, which represents traders’ expectations for the rate of inflation over the life of the securities and is known as the break-even rate, was 2.07 percentage points, down from the 2012 high of 2.45 percentage points on March 20. It touched a 2012 low of 1.9 percentage points on Jan. 3.

“There is a lot of uncertainty about growth domestically and uncertainty abroad that continues to keep yields low,” said Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York, said in a telephone interview.

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