U.S. 10-Year Yields Reach Six-Week High as Budget Optimism Rises

Treasuries slid, pushing benchmark 10-year yields to a six-week high, as optimism increased that talks are progressing on a budget deal in Washington that would head off a recession in the world’s biggest economy.

The government sold $35 billion of two-year debt to lower-than-average demand. The offering’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, fell to 3.59, the least since February, after matching a record-high 4.07 last month. The Treasury will auction $35 billion in five year debt tomorrow in the second of four note sales this week totaling $113 billion. U.S. one-month bill rates fell below zero for a second day.

“I’m surprised by the magnitude of the move in Treasury yields today,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “There’s more optimism that we’re closer to a fiscal-cliff deal of some sort.”

The 10-year note yield climbed seven basis points, or 0.07 percentage point, to 1.77 percent, at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 1.78 percent, the highest level since Nov. 2, surpassing its 200-day moving average of 1.75 percent. The price of the 1.625 percent security due in November 2022 dropped 5/8, or $6.25 per $1,000 face amount, to 98 21/32.

Thirty-year bond yields rose eight basis points to 2.95 percent, also the highest since Nov. 2, and the yield on the current two-year note increased two basis point to 0.25 percent.

Negative Rates

One-month bill rates fell to as low as negative 0.005 percent before trading at zero. They reached that level Dec. 14 as traders bet temporary government insurance on some bank-deposit accounts will end as scheduled on Dec. 31 after a Senate effort to extend it failed. That would trigger a flow of several hundred billion dollars into Treasury bills, repurchase agreements and money funds that purchase government securities, according to Fed primary dealers including Bank of America Corp.

Treasuries have returned 2.3 percent this year, set for the worst performance since a 3.7 percent decline in 2009, a Bank of America Merrill Lynch index shows. The Standard & Poor’s 500 Index of U.S. stocks has returned 16 percent, including reinvested dividends, after a 2.1 percent return last year.

U.S. government securities traded today at the least expensive levels in more than five weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.78 percent, the least costly since Oct. 25.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.77 percent.

Fiscal Cliff

Treasuries fell as President Barack Obama and House Speaker John Boehner met at the White House in their talks to avert more than $600 billion in automatic spending cuts and tax increases in January, according to Boehner’s spokesman.

Obama is considering a possible budget concession on Social Security cost-of-living increases after Boehner dropped his opposition to raising tax rates for some top earners, according to two people familiar with the private talks who requested anonymity. Obama seeks an income-tax increase for top earners, while Boehner wants to cut spending on entitlement programs.

If officials fail to reach agreement and push the economy over the fiscal cliff of spending cuts and tax boosts, the result may be a recession next year, according to the Congressional Budget office.

Note Auctions

The U.S. will sell $29 billion of seven-year notes on Dec. 19 and $14 billion of five-year Treasury Inflation Protected Securities on Dec. 20.

“The amount of supply hitting the market this week is putting pressure on Treasuries,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York.

The Treasury notes sold today drew a yield of 0.245 percent, the lowest since July, compared with an average forecast of 0.247 percent in a Bloomberg News survey of six of the Federal Reserve’s 21 primary dealers.

Indirect bidders, an investor class that includes foreign central banks, purchased 17.7 percent of the two-year notes, the lowest on record going back to 2003. That compared with 34.4 percent last month and an average of 31.6 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 28.4 percent, compared with 23.6 percent in November and a record 38.2 percent at the October sale. The average as the past 10 offerings was 16.1 percent.

Record High

Last month’s two-year auction drew a bid-to-cover ratio of 4.07, matching a record sale high set in November 2011. The average for the past 10 auctions was 3.82.

Two-year notes have returned 0.3 percent this year, according to Bank of America Merrill Lynch indexes. The securities gained 1.5 percent in 2011, while Treasuries overall returned 9.8 percent.

China, the largest foreign holder of Treasuries, boosted its holdings of the securities by $7.9 billion, or 0.7 percent, in October during the U.S. presidential election campaign to $1.1615 trillion, Treasury data showed today. China held $1.153.6 trillion of Treasuries in September, a decrease from the $1.1555 trillion reported for the previous month.

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