Treasury Yields Fall to Lows on Europe, 2-Year Note Sale

Treasuries rose, with yields falling to records for a second consecutive day, amid concern Europe’s debt crisis is spreading to the region’s strongest nations.

Yields on five, 10- and 30-year securities touched new lows after a report from Reuters cited European Union officials saying Greece was seen missing targets for reducing debt. Yields on Spain and Italy’s debt rose. The U.S. sold $35 billion in two-year notes, drawing almost record demand and an all-time low yield, and is scheduled to auction an equal amount in five-year notes tomorrow.

“People are flocking back into the Treasury market,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “All of Europe is now feeling it. There’s a global flood and guys are going out for yield.”

The yield on the benchmark 10-year note fell four basis points, or 0.04 percentage point, to 1.3875 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. The yield sank below the 1.396 percent it reached yesterday. The 1.75 percent note due in May 2022 rose 11/32, or $3.44 per $1,000 face amount, to 103 10/32.

The five-year note fell to 0.5394 percent and the 30-year bond declined to 2.4530 percent, less than yesterday’s 0.5411 percent and 2.4752 percent.

Valuation measures show U.S. sovereign securities are at the most costly levels ever. The term premium, a model created by economists at the Fed, dropped to negative 1.023 percent, the all-time most expensive. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Euro Records

U.S. government securities returned 1.3 percent this month through yesterday, including reinvested interest, according to Bank of America Merrill Lynch indexes. German debt returned 2.5 percent, the indexes showed, while the MSCI All-Country World Index of stocks dropped 2 percent in the period on a similar total return basis.

Spanish bonds fell earlier, pushing five- and 10-year yields to euro-era records, as the nation’s borrowing costs rose at an auction amid concern its banks’ and regions’ debts will force it to seek a sovereign bailout.

Italy’s 10-year bonds declined for a third day after services and manufacturing in the euro region shrank in July.

Officials of Greece’s troika of international creditors -- the European Commission, European Central Bank and International Monetary Fund -- arrived in Athens today amid doubts the nation will meet the commitments attached to its bailout funding.

‘Well Bid’

Germany’s bunds sank, pushing up yields from close to all-time lows, after Moody’s cut the outlook on the nation’s top rating citing concern it will have to support weaker euro-region members. The euro fell below $1.21 for a second day. The yield difference, or spread, between the German and U.S. debt narrowed to 15 basis points, the least on a closing basis since July 3.

“As long as Europe continues to be a concern and U.S. economic numbers come down, the Treasury auctions should be well bid,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York.

U.S. two-year notes yielded an auction record 0.220 percent today, the same as in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers. The previous auction low was 0.222 percent in August 2011. The yield on the current two-year note was little changed at 0.21 percent after touching a record 0.1431 in September 2011.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was the second-highest ever at 4.0, compared with an average of 3.72 for the past 10 sales. The record was 4.07 percent in November 2011.

‘Dumping Supply’

Indirect bidders, an investor class that includes foreign central banks, purchased 30.9 percent of the notes, compared with an average of 34 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 9.9 percent of the notes at the sale, compared with an average of 11 percent.

“It’s clear that there are not enough of the securities to meet the market’s demand,” said Scott Sherman, an interest-rate strategist in New York at Credit Suisse Group AG, a primary dealers. “The Fed had committed to dumping supply there and yet these auctions still do well, which tells you that there is still a ton of demand for risk-free assets here.”

The Treasury is selling $99 billion in notes and bonds this week, including $29 billion of seven-year debt July 26.

Two-year notes have gained 0.2 percent this year, compared with 3 percent gain for Treasuries overall, according to Bank of America Merrill Lynch indexes.

Quantitative Easing

The Fed purchased $1.81 billion of Treasuries due from February 2036 to May 2042 today as part of a program known as Operation Twist. The central bank is swapping short-term Treasuries in its holdings for longer maturities in a bid to send borrowing costs lower and stimulate the economy.

Fed Governor Sarah Bloom Raskin said yesterday U.S. policy makers will debate at a meeting next week whether to start another program to spur growth through large-scale Fed purchases of bonds.

The central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, seeking to cap borrowing costs.

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 2.03 percentage points, the lowest since Jan. 17. It is 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.

Economic Data

Gross domestic product, the value of all goods and services the nation produced, rose at a 1.4 percent annual rate in the second quarter after a 1.9 percent gain in the prior quarter, according to the median forecast of 70 economists surveyed by Bloomberg News. Factory orders softened and new-home sales were little changed, other data may show.

Sales of new homes may have risen to a 371,000 annual pace in June, the most since April 2010, according to economist forecasts in a Bloomberg News survey before figures from the Commerce Department tomorrow.

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