Treasury Bond Demand Most This Year on Fiscal-Cliff Concern
Treasury 30-year bond yields fell to a two-month low as the U.S. received the highest demand this year at an auction of the debt amid concern lawmakers risk pushing the economy into recession over a budget showdown.
The difference in yields between 10- and 30-year debt narrowed to the least since August with demand for the bonds, as measured by the number of bids submitted compared with the amount of debt sold, the highest since December. Treasuries have risen since the re-election of President Barack Obama and a split Congress on concern they’ll be unable to compromise and avoid a series of automatic tax increases and spending cuts that have become known as the fiscal cliff.
“The strong auction reflects strong demand,” said Priya Misra, head of U.S. rates strategy at Bank of America Corp. in New York, which as one of the Federal Reserve’s 21 primary dealers is obliged to bid in U.S. auctions. “If you are worried about the fiscal cliff, the place to be is the long end of the Treasury curve, as the yield there has more room to fall.”
The yield on the current 30-year bond dropped eight basis points, or 0.08 percentage point, to 2.75 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. It touched 2.74 percent, the lowest level since Sept. 7. The price of the 2.75 percent security maturing in August 2042 rose 1 17/32, or $15.31 per $1,000 face value, to 99 31/32. Ten-year note yields fell three basis points to 1.62 percent.
The U.S. faces $1.2 trillion in mandated spending cuts and tax increases starting Jan. 1 if Congress can’t agree to reduce the deficit, which totaled $1.09 trillion in fiscal 2012. The Congressional Budget Office has said the world’s biggest economy would slow by as much as 0.5 percent next year if Congress fails to prevent the measures from kicking in, pushing the economy over what’s become known as the fiscal cliff.
As Obama was re-elected this week, Republicans maintained control of the House of Representatives and Democrats held on to a Senate majority.
The 30-year bonds sold today drew a yield of 2.82 percent, compared with a forecast of 2.848 percent in a Bloomberg News survey of nine primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of bonds offered, was 2.77, versus an average of 2.59 for the past 10 sales.
Indirect bidders, an investor class that includes foreign central banks, purchased 45.4 percent of the bonds sold today, compared with 26.5 percent at the October sale, which was the lowest level since August 2011, and an average for the past 10 offerings of 32.6 percent.
Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 12.4 percent on the bonds, versus 14.2 percent at the last sale and an average of 14.4 percent for the past 10 auctions.
Thirty-year bonds have returned 4.3 percent this year, compared with a 2.4 percent gain in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes.
The probability that political wrangling will push the U.S. over the fiscal cliff has increased to about 15 percent, Standard & Poor’s said today in a report. The rating company stripped the U.S. of its AAA credit rating on Aug. 5, 2011, after months of political brinkmanship that pushed the nation to the deadline an agreement to lift the debt ceiling.
“Our base-case forecast has long been for Congress to resolve the fiscal cliff after the election and before the end of the year,” said S&P, which has a negative outlook on the U.S. credit grade. “Lawmakers will finally come to realize that they must reach some compromise on tackling the long-term federal debt, phasing in spending cuts and tax increases over several years.”
Today’s auction was the final of three offerings of coupon- bearing securities by the Treasury this week totaling $72 billion.
The U.S. sold $24 billion of 10-year debt yesterday at a yield of 1.675 percent and auctioned $32 billion of three-year notes on Nov. 6 at a yield of 0.392 percent. Both sales drew lower demand than at previous offerings.
Investors bid for 2.59 times the amount of securities available yesterday, versus 3.26 times at the 10-year auction in October. For the three-year sale, the figure dropped to 3.41, from 3.96 a month earlier.
“There is definitely concern out there, given the policy and economic uncertainties, and even at these low yields investors are willing to pay up to get the long end,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.
Long-bond yields fell yesterday the most in 11 weeks as Obama’s re-election also fueled speculation the Fed will keep buying Treasuries.
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.”
Fewer Americans than forecast filed claims for unemployment insurance last week as the effects of Hurricane Sandy started to show up. Applications for jobless benefits fell by 8,000 to 355,000 in the week ended Nov. 3, the Labor Department said today in Washington. A Bloomberg News survey had forecast claims for jobless benefits increased by 2,000 to 365,000 last week.
Cordell Eddings in New York at email@example.com
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