Treasuries Gain as Rally in European Debt Lures Buyers to U.S.

Treasuries rose, with 30-year bond yields dropping to the lowest levels in more than a year, as a fixed-income rally in Europe enhanced the allure of higher-yielding U.S. debt.

Five-year notes gained as the U.S. auction of $35 billion of the securities attracted stronger-than-average demand. Benchmark 10-year notes advanced as equivalent-maturity German bund yields fell to a record, while yields on Spanish 10-year securities dropped below U.S. yields amid concern European Central Bank efforts to boost economic growth and ward off deflation are failing. The Federal Open Market Committee began a two-day policy meeting where they are expected to cut monthly purchases of Treasuries.

“Yields got to an attractive level on a global basis,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. Investors “prefer to own the U.S. bond.”

Treasury 30-year yields declined three basis points, or 0.03 percentage point, to 3.23 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 3.375 percent securities due in May 2044 added 18/32, or $5.63 per $1,000 face amount, to 102 27/32. The yield reached the lowest level since June 2013.

Benchmark 10-year note yields fell three basis points to 2.46 percent.

Russia Sanctions

Treasuries were supported today as the U.S. joined with the European Union in escalating the penalties for Russia in response to Russian President Vladimir Putin’s refusal to end support for Ukrainian rebels.

The extra yield that benchmark 10-year notes offer over their Group of 7 counterparts rose as high as 73 basis points, matching the most since April 2010 as the yield on the German 10-year bund touched 1.11 percent, the least on record. Spanish 10-year yields dropped to a record low of 2.46 percent.

“Treasuries still look cheap to foreign debt,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York.

The amount of Treasuries traded through Icap Plc, the largest inter-dealer broker of U.S. government debt, rose to $275 billion, from $221 billion yesterday. The daily average volume this year is $325 billion.

Investors in Treasuries increased bets the prices of securities would drop in value, in the week ending yesterday, according to a survey by JPMorgan Chase & Co.

Market Positions

The proportion of net shorts or bets the price of the securities will decrease, rose to 29 percentage points, from 25 percentage points the previous week, according to JPMorgan. The percent of outright shorts, or bets the securities will drop in value, rose to 42 percent, from 40 percent. The percent of outright longs dropped to 13 percent, from 15 percent as of yesterday.

The five-year notes auctioned today yielded 1.720 percent, the highest since April, compared with a forecast of 1.727 percent in a Bloomberg News survey of six of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.81, versus an average of 2.72 for the past 10 sales.

“The auction was pretty strong,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., which as a primary dealer is obligated to bid in U.S. debt sales. “Five-year notes are pretty attractive at these levels versus the rest of the yield curve.”

Indirect bidders, an investor class that includes foreign central banks, purchased 48.2 percent of the notes, compared with an average of 46.1 percent for the past 10 sales.

Debt Auctions

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 25.9 percent of the notes, the most since December 2012, versus an average of 12.8 percent for the past 10 auctions.

The Treasury sold $29 billion of two-year notes yesterday at the highest yield in more than three years. The bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, fell to 3.22, the lowest since March.

The U.S. is scheduled to conclude this week’s auctions with $29 billion of seven-year debt and $15 billion of two-year floating-rate securities tomorrow.

The difference between five- and 30-year yields narrowed to 153 basis points, the least since January 2009, as subdued inflation supported longer maturities. Treasuries in a Bloomberg index of U.S. debt maturing in one to five years have returned 0.7 percent in 2014. Debt due in 10 years and longer has gained 14 percent.

Fed Policy

Shorter-maturity notes, which tend to track the Fed’s benchmark interest rate, are lagging behind longer-dated debt this year as policy makers begin a two-day meeting amid speculation they will raise borrowing costs next year.

The Fed is scaling back the bond-buying program it has used to support the economy, after increasing the size of its balance sheet to a record $4.41 trillion. Policy makers will reduce monthly purchases to $25 billion from $35 billion, based on a Bloomberg News survey of economists.

The central bank has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008 to help spur a recovery. Traders see about a 62 percent chance the Fed will raise the target for its benchmark to at least 0.5 percent by July, based on futures contracts.

A report tomorrow is forecast to show gross domestic product in the world’s biggest economy expanded in the second quarter after contracting in the first, according to a Bloomberg survey. The U.S. added more than 200,000 jobs for a sixth month in July, according to a Bloomberg News survey of economists before the Labor Department report Aug. 1.

Before it's here, it's on the Bloomberg Terminal.