U.S. Bonds Rise Before Auction as Refuge Demand Renewed

Treasury bonds rose for the first time in four days as a report showing the euro-area recession deepened fueled demand before a $16 billion auction of the debt.

The securities being sold yielded 3.20 percent in pre-auction trading, compared with 3.07 percent at a previous auction of similar-maturity debt on Jan. 10. The euro-area economy shrank 0.6 percent in the final three months of 2012, the worst performance in almost four years, as output slumped in its three biggest economies.

“The weak global economic reports gave the Treasury market a bit of a boost, but we still have the 30-year auction to contend with, which is always a wild card,” said Sean Murphy, a trader at Societe Generale in New York, one of the 21 primary dealers that are required to bid at government debt auctions. “The market likes to see price concession heading into long bond auctions.”

The U.S. 30-year bond yield dropped three basis points, or 0.03 percentage point, to 3.21 percent at 11:35 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.75 percent security due November 2042 rose 14/32, or $4.34 per $1,000 face amount, to 91 7/32.

Claims Drop

Treasuries pared gains after a government report showed claims for unemployment benefits dropped by 27,000 the most in a month, to 341,000 in the period ended Feb. 9, compared with 366,000 a week earlier. The forecast was for a drop to 360,000, according to the median estimate of economists surveyed by Bloomberg.

Investors submitted orders to buy 2.77 times the amount of available 30-year debt at last month’s bond auction, the strongest bid-to-cover ratio since November.

“The overnight news around the world was very weak underscoring weak global growth, which has led to safe haven buying,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “The lack of a concession before the auction is a concern as inflation fears have risen of late and with it, a fear of higher rates. But there is enough concern from economic and political risks as well as Fed purchases, that continue to support demand.”

Indirect bidders, a class of investors that includes foreign central banks, bought 37.8 percent of the bonds at the January sale, versus 33.7 percent at the December auction. The average for the past 10 offerings is 35.26 percent.

Market Returns

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 16.7 percent of the securities at last month’s sale, less than the average 15.66 percent at the past 10 auctions.

Thirty-year bonds have lost 5.24 percent this year, compared with a 1.12 percent decline in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes.

“Perhaps all the emotions in the air along with the upcoming concerns over the fiscal fight part 2, will lead to a rekindling of the tactical-based affair with long bonds,” George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., a primary dealer, wrote in a note to clients. “We love the bond in the near-term and expect a solid to strong auction which will trigger some curve flattening.”

The U.S. sold $24 billion of 10-year debt yesterday at a yield of 2.046 percent and auctioned $32 billion of three-year notes on Feb. 12 at a yield of 0.411 percent.

The auctions will raise $8 billion of new cash, as maturing securities held by the public total $64 billion, according to the Treasury.

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