Treasuries Rise 2nd Day as ECB Buying Extends Yield Premium

Treasuries rose a second day as investors sought higher yields than they can get in Europe, where central banks are buying government debt as part of Mario Draghi’s plan to boost a flagging economy.

Yields on 10-year German securities fell to a record, pushing the yield difference between 10-year Treasuries and bunds to the widest since 1989. U.S. debt was supported by a U.S. dollar that rallied to an almost 12-year high versus the euro. Treasuries remained higher after the U.S. sold $24 billion of three-year notes with the biggest share of purchases in almost five years by a group including foreign central banks.

“It’s what’s going on in Europe that’s driving our yields lower,” Donald Ellenberger, who oversees about $10 billion as head of multi-sector strategies at Federated Investors in Pittsburgh. “A stronger dollar means less inflation pressure here in the U.S., and it’s certainly good for the Treasury market.”

The benchmark 10-year Treasury yield dropped six basis points, or 0.06 percentage point, to 2.13 percent as of 5 p.m. in New York. That followed a five basis-point decline Monday. The 2 percent note due in February 2025 rose 17/32, or $5.31 per 1,000 face amount, to 98 27/32.

Though the yield has climbed from January’s low of 1.64 percent, it’s still less than the 3.28 percent average for the past decade.

The 10-year German bund yield dropped eight basis points to 0.23 percent. The yield premium Treasuries have over bunds reached 1.90 percentage points.

The dollar touched $1.0693 per euro, the strongest level since April 2003.

Auction Results

At today’s auction, 51.4 percent of the three-year securities went to indirect bidders, a class of investors that includes foreign central banks. That was the most since April 2010, and compares with an average for the past 10 auctions of 37.2 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8 percent. That left the Fed’s primary dealers -- the 22 banks and brokerages obliged to bid at U.S, auctions -- with 40.5 percent, down from a 46 percent average at the past 10 offerings.

“We weren’t thinking the three-year would be difficult, given that the yield has risen so dramatically,” said David Keeble, head of fixed-income strategy in New York at Credit Agricole CIB. “We’ve had a lot of very good auctions from the Treasury in recent months.”

Almost Outstanding

The sale was rated a “4” by six of the primary dealers, based on a scale of one through five, with one a failure and five outstanding.

The securities yielded 1.104 percent, compared with an average forecast of 1.108 percent in a survey of eight primary dealers.

The U.S. will sell $21 billion of 10-year debt Wednesday and $13 billion of 30-year bonds the following day. This week’s auctions will raise $23.8 billion of new cash, with $34.2 billion of debt maturing, based on Treasury Department data.

European bonds rallied a second day as the region’s central banks were said to have bought government bonds, including German debt that trades with a negative yield, in the second day of their expanded quantitative-easing plan. The bonds extended a 14-month rally amid speculation that European Central Bank President Draghi’s plan to buy 60 billion euros ($65 billion) of debt a month will create scarcity of government bonds.

“The U.S. looks cheap, and that’s going to be the game,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Demand will be there from foreign and domestic accounts because there’s nowhere else to go.”

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