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Treasury Yield Drops Most Since May on Fed Wagers, Cliff

The Economy Election 2012
People celebrate the news that U.S. President Barack Obama has won re-election in Times Square in New York on Nov. 7. Photographer: Scott Eells/Bloomberg

Treasury 10-year yields slid the most in five months as President Barack Obama’s re-election bolstered bets Federal Reserve Chairman Ben S. Bernanke will keep supporting the economy and the so-called fiscal cliff of spending cuts and tax increases loomed.

Bonds stayed higher even after the U.S. sale of $24 billion in 10-year notes drew less-than-average demand. Yields on the debt are at a month low as investors refocus on the U.S. budget debate and Europe’s debt crisis. Republicans held the House of Representatives and Democrats the Senate. Treasuries have returned 1.8 percent in 2012 and 15 percent since Obama took office in 2009, Bank of America Merrill Lynch indexes showed.

Ten-year notes have “a bid based upon the Bernanke expectation for easy money as far as the eye can see,” Pacific Investment Management Co.’s Bill Gross, who runs the world’s biggest bond fund, said on Bloomberg Television’s “Street Smart” with Trish Regan.” As for the fiscal cliff, “finding that middle ground will be very difficult,” Gross said.

The 10-year yield fell 10 basis points, or 0.10 percentage point, to 1.65 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It slid as much as 13 basis points, the biggest intraday drop since May 30, to 1.62 percent, the lowest level since Oct. 3. The price of the 1.625 percent note due in August 2022 gained 30/32, or $9.38 per $1,000 face amount, to 99 26/32.

Gross’s Outlook

Ten-year yields will stay around 1.65 to 1.7 percent for the rest of the year and into 2012, Gross said.

Five-year note yields decreased eight basis points to 0.68 percent, and yields on 30-year bonds dropped nine basis points to 2.83 percent.

The fiscal cliff comprises $600 billion of tax increases and spending cuts scheduled to take effect automatically next year unless Congress acts.

The 10-year notes auctioned today yielded 1.675 percent, compared with a forecast of 1.674 percent in a Bloomberg News survey of seven of the Fed’s primary dealers. The securities yielded 1.67 percent in pre-auction trading.

“The auction tailed a bit, which is not surprising given the run-up we’ve seen,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co., referring to the government having to pay a rate higher than pre-auction levels to sell the notes. “Still, we are seeing pretty strong demand for Treasuries as the anticipation of the fiscal cliff and the uncertainty about leadership from Washington continues.”

Demand Gauge

The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.59, versus an average of 3.08 for the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 39.7 percent of the notes, compared with an average of 39.4 percent at the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 14.1 percent of the notes, compared with an average of 18.7 percent at the past 10 auctions.

The Treasury sold $32 billion of three-year debt yesterday and is scheduled to conclude this week’s note and bond auctions with a $16 billion 30-year sale tomorrow.

Ever since Lyndon B. Johnson defeated Barry Goldwater for the presidency in 1964, yields on 10-year Treasuries have dropped about 40 basis points in the first month when a Democrat wins, and risen 19 after a Republican victory, according to data compiled by Bloomberg.

Obama defeated Republican challenger Mitt Romney, becoming only the second Democrat since Franklin Roosevelt to win another term. Bill Clinton was re-elected in 1996. Republicans’ continued control of the House and Democrats’ hold on their Senate majority set the stage for further combat on finances.

Higher Likelihood

“In terms of the political make-up of Washington, it’s pretty much unchanged,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “The likelihood of getting to the fiscal cliff is higher than it would have been with Romney. That’s what’s motivating the market.”

Fitch Ratings warned that the U.S. may be downgraded next year unless lawmakers avoid the tax boosts and budget cuts and raise the debt ceiling in a timely manner, while Moody’s Investors Service said it will wait to see the economic impact should the nation experience a fiscal shock. Standard & Poor’s stripped the U.S. of its AAA credit rating on Aug. 5, 2011, after months of political wrangling over the debt ceiling.

Market ‘Reacting’

Ten-year yields may fall to a record low of 1.2 percent in the aftermath of the election amid the fiscal uncertainty, said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut.

“Markets were positioned for some sort of change and didn’t get it, and now the market is reacting,” di Galoma said in a telephone interview. “There is a lot of uncertainty now as it relates to the fiscal cliff, policy and the growth environment that needs to be worked through.”

Ten-year yields dropped to a record 1.379 percent July 25.

The Fed purchased $2.3 trillion of Treasuries and mortgage-related bonds in two rounds of quantitative-easing stimulus from 2008 to 2011 and has begun a third effort. The central bank announced Sept. 13 it would buy $40 billion a month of mortgage-backed securities until the outlook for the labor market improves “substantially.”

Romney had said he wouldn’t reappoint Fed Chairman Bernanke to a third term in 2014.

Fed Holdings

The central bank also is swapping shorter-term Treasuries in its holdings with those due in six to 30 years as part of its efforts to support the economy by putting downward pressure on long-term borrowing costs.

The Fed bought $1.85 billion of Treasuries today maturing from February 2036 to August 2042. It sold $7.67 billion of U.S. debt due in 2014 and 2015.

German bunds climbed, pushing 10-year yields to the lowest level in more than two months, after European Central Bank President Mario Draghi said inflation was subdued and the region’s three-year-old debt crisis was starting to hurt the nation’s economy. The yields touched 1.36 percent, the least since Sept. 3.

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