Treasuries Advance After Strong Demand at 10-Year Note Auction

Treasuries rose as the failure of European leaders to reassure investors the region’s sovereign-debt crisis will be contained led to higher-than-average demand at a U.S. auction of $21 billion in 10-year notes.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.26, versus 2.85 in September and an average of 3.11 for the prior 10 sales. Benchmark 10-year yields declined from the highest level in more than two weeks as Spain’s Prime Minister Mariano Rajoy, struggling to contain the country’s deficit, met in Paris with French President Francois Hollande.

“The 10-year note auction was very stellar -- coming in better than expected -- and equities are weak, giving support to Treasuries,” 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. “There is still a lot of uncertainty with regards to Europe, the ‘fiscal cliff’ and global domestic growth that is keeping the market underpinned.”

The yield on the current 10-year note fell four basis points, or 0.04 percentage point, to 1.67 percent, at 5 p.m. in New York, according to Bloomberg Bond Trader data. It earlier rose as high as 1.75 percent, the most since Sept. 24. The 1.625 percent security due in August 2022 gained 9/32 or $2.81 per $1,000 face amount, to 99 15/32. Thirty-year bond yields fell five basis points to 2.88 percent.

The Standard & Poor’s 500 Index declined 0.6 percent.

Strong Demand

The notes sold today drew a yield of 1.70 percent, compared with a forecast of 1.722 percent in a Bloomberg News survey of nine of the Federal Reserve’s 21 primary dealers.

Indirect bidders, an investor class that includes foreign central banks, purchased 41.4 percent of the notes, the same as the average for the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 22.9 percent of the notes, compared with an average of 17.3 percent at the past 10 auctions.

The Treasury drew record demand for a $32 billion three-year note sale yesterday, and is due to auction $13 billion of 30-year debt tomorrow in the final of three weekly auctions.

“We have seen a steepening of the curve over the last week that has brought the market back to attractive levels,” said Scott Sherman, an interest-rate strategist at Credit Suisse Group AG in New York, which as a primary dealer is required to bid at U.S. debt auctions. “There is still strong demand for risk-free assets, and Treasuries are still benefiting.”

‘Stay Low’

U.S. Treasury yields will remain at or close to record lows into next year as headwinds from Europe and a potential U.S. fiscal contraction tempers growth, according to Fidelity Management & Research’s Bill Irving in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“I am not preparing for a rising-yield environment because we have all these headwinds,” said Irving, who manages $50 billion at Fidelity in Merrimack, New Hampshire. “Yields are going to stay low. The Fed is going to continue to put pressure on long-term Treasury yields.”

The 10-year yield will rise to 1.74 percent at year’s end and 1.87 percent at the conclusion of the first quarter of 2013, according to the median forecast of economists in a Bloomberg survey.

Dimon’s Warning

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said bond markets would spurn U.S. debt if lawmakers fail to reach an agreement to address the $600 billion of potential tax increases and spending cuts scheduled to go into effect starting next year that’s become known as the fiscal cliff.

“It’s virtually assured” that markets would turn against the U.S., Dimon said today in Washington. “The question is when and how.”

Bill Gross, manager of the world’s biggest bond fund, reduced his holdings of Treasuries for a third consecutive month to the lowest level since last October on concern record U.S. debt will lead to inflation.

The proportion of U.S. government and Treasury debt in Pacific Investment Management Co.’s $278 billion Total Return Fund dropped to 20 percent of assets in September from 21 percent the prior month, according to data released on the Newport Beach, California-based company’s website.

Treasuries held gains after the Federal Reserve said in its Beige Book business survey that the U.S. economy expanded “modestly” last month, even as the labor market showed little change. Consumer spending was “flat to up slightly” since its last report, the Fed said in the survey, which provides anecdotal evidence on the health of the economy before the Federal Open Market Committee meets in Washington on Oct. 23-24.

Interest Rates

Fed Bank of Minneapolis President Narayana Kocherlakota said the central bank shouldn’t automatically raise interest rates from the current record low at almost zero when the outlook for inflation rises above 2.25 percent.

“The committee’s decision in this context would hinge on a delicate cost-benefit calculation that would weigh the inflation increases against the employment gains,” Kocherlakota said.

Fed policy makers said Sept. 13 the benchmark interest rate was likely to stay low through the middle of 2015. The central bank, which purchased $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 in two rounds of quantitative easing, began in September a third effort to buy $40 billion of mortgage debt a month until the economic recovery is well established.

The Fed sold $7.8 billion of Treasuries today as part of its Operation Twist program to replace $267 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

Ten-year U.S. debt has gained 3.7 percent this year, according to Bank of America Merrill Lynch indexes, outperforming the 1.9 percent gain in the broader Treasury market. The notes returned 17 percent in 2011, almost double the 9.8 percent gain by Treasuries overall.

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