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Treasuries Snap Longest Rally Since 2008 on Spain Budget

Treasuries fell for the first time in nine days, snapping their longest rally in almost four years, as optimism Spain is moving closer to meeting budget-deficit targets reduced the refuge appeal of U.S. government debt.

Demand for the safest assets at quarter-end helped support the Treasury’s auction of $29 billion of seven-year notes even with investors less risk-averse. The notes were sold at a yield of 1.055 percent, versus a forecast of 1.064 percent in a Bloomberg News survey of six of the Federal Reserve’s 21 primary dealers that bid on the sale. The issue’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.61, the lowest in 11 months and below the 2.82 average for the past 10 auctions.

“We’re seeing a bit of a respite here,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. Spain is “taking the necessary measures. It’s a positive step,” he said.

The yield on the current seven-year note rose three basis points, or 0.03 percentage point, to 1.05 percent at 5 p.m. in New York trading, according to Bloomberg Bond Trader Prices.

Benchmark 10-year note yields increased five basis points to 1.65 percent. The price of the 1.625 percent security maturing in August 2022 dropped 13/32, or $4.06 per $1,000 face amount, to 99 23/32. Thirty-year bond yields added six basis points to 2.84 percent.

Market Volume

Treasury volume reported today by ICAP Plc, the largest interdealer broker of U.S. government debt, dropped to $297 billion, down from $301 billion yesterday. Daily volume has averaged $242 billion in 2012. It touched $464 billion Sept. 13, the highest in 13 months.

Treasuries gained for an eighth day yesterday, the longest stretch since December 2008, as investors seeking a refuge from Europe’s sovereign-debt crisis bolstered demand for the safest securities. Demonstrators in Spain and Greece protesting budget cuts clashed with police this week.

“It’s just a little bit of unwinding of the fears yesterday,” said Ira Jersey, an interest-rate strategist in New York at the primary dealer Credit Suisse Group AG. “The worry was that there wouldn’t be a bailout for Spain and the unrest would force the government to not make austerity.”

Treasuries extended their drop after Spanish Prime Minister Mariano Rajoy’s nine-month-old government announced its fifth austerity package in what may be a move to head off tougher conditions demanded as part of a potential European bailout. Rajoy’s Cabinet approved a new tax on lottery winnings and a cut in ministries’ spending to shrink the euro area’s third-biggest budget deficit.

Bailout Decision

Rajoy has been stoking frustration among some European leaders for delaying a decision on whether to seek a bailout from the euro region’s rescue fund that would allow the European Central Bank to prop up the nation’s bond market.

The yield on Spain’s 10-year note dropped 12 basis points to 5.95 percent, according to Bloomberg data, after touching a three-week high of 6.11 percent earlier.

Stocks rose as risk appetite increased. The Standard & Poor’s 500 Index gained for the first time in six days, climbing 1 percent.

U.S. government securities have lost 0.2 percent this month, paring their gain for the quarter to 0.7 percent, according to Bank of America Merrill Lynch’s Treasury Master index. Treasuries have returned 2.4 percent this year, the index showed, compared with a 22 percent gain by the S&P 500, including reinvested dividends. Treasuries rose 9.8 percent in 2011, versus a 2.1 percent gain by the equities benchmark.

Treasury Auction

At today’s auction of U.S. seven-year notes, indirect bidders, an investor class that includes foreign central banks, purchased 34.9 percent of the notes, the least since the January offering. The average at the past 10 sales was 40.6 percent.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 17 percent of the notes, compared with an average of 14.1 percent at the last 10 auctions.

Today’s yield was the second-lowest a seven-year note sale since Bloomberg began keeping records in 1980. The lowest was 0.954 percent at the July offering.

“It was a very strong auction in terms of yield,” said Ray Remy, head of fixed income in New York at the primary dealer Daiwa Capital Markets America Inc. “The reason it was strong was because of quarter-end.”

Investors such as banks and mutual funds are often attracted to the safest securities at quarter-end to improve the quality of assets on their balance sheets.

Three Offerings

Today’s offering was the final of three note auctions this week totaling $99 billion. The U.S. sold $35 billion of two-year debt on Sept. 25 at a yield of 0.273 percent and the same amount of five-year notes yesterday at a yield of 0.647 percent. Treasuries trimmed losses earlier after the Commerce Department said U.S. household purchases, which account for about 70 percent of the economy, grew 1.5 percent in the second quarter, versus a previously reported 1.7 percent. An index of pending home resales fell 2.6 percent in August after a revised 2.6 percent gain in July, figures from the National Association of Realtors showed today in Washington.

The five-year, five-year forward break-even rate, a measure of the inflation outlook the Fed uses to help guide monetary policy, was 2.67 percent on Sept. 25, down from a 13-month high of 2.88 percent on Sept. 14. The 10-year average is 2.75 percent.

Quantitative Easing

The central bank announced on Sept. 13 plans to buy $40 billion of mortgage securities a month in a third round of quantitative easing as it seeks to spur economic growth and lower a jobless rate stuck above 8 percent since February 2009. It said it would continue the purchases until the recovery is well-established.

A measure of relative yields on mortgage securities that guide U.S. home-loan rates was near a record low today amid bets the Fed will find a shortage of the bonds as it expands purchases. A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value was 63 basis points higher than an average of five- and 10-year Treasury rates. The record, 55 basis points, was reached Sept. 25. The 2012 average is 135 basis points.

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