Treasuries Decline After $11 Billion Auction of 30-Year Bonds
http://www.bloomberg.com/apps/news?pid=20601009&sid=aPOHJyJswHf0#
By Susanne Walker
July 9 (Bloomberg) -- Treasuries fell as the government’s 30-year bond auction drew less demand than the previous sale and traders speculated that the rally yesterday that pushed 10-year note yields down the most since March was too large to sustain.
The
bid-to-cover on the $11 billion in bonds, which gauges demand by comparing total bids with the amount of securities offered, was 2.36. The ratio was 2.68 at the June auction. The sale concludes a record four auctions this week totaling $73 billion. The 30-year
bond yield yesterday touched the lowest in seven weeks after investors submitted the most bids on record at an auction of 10-year notes.
“The auction was weaker than expected, but the market seems to be holding in,” said
Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “There’s a general demand for Treasuries as it relates to a safehaven bid from the economy not showing any forms of life.”
The
yield on the benchmark 10-year note rose seven basis points, or 0.07 percentage point, to 3.38 percent at 1:05 p.m. in New York, according to BGCantor Market Data. The 3.125 percent security maturing in May 2019 fell 19/32, or $5.94 per $1,000 face amount, to 97 29/32. The yield dropped yesterday on an intraday basis the most since March 18, when the Federal Reserve said it would start buying U.S. debt to cap borrowing costs.
Indirect Bidders
The bonds sold today yielded 4.303 percent, compared to the 4.292 percent average forecast of four bond-trading firms surveyed by Bloomberg News. The offering is the second reopening of the $14 billion 30-year bond auction on May 7. The $11 billion sale on June 11 drew a yield of 4.72 percent, which was the highest since August 2007.
The bid-to-cover was 2.68 at the June auction, compared with 2.14 in May. It averaged 2.28 at the past 10 sales.
Indirect bidders, an investor class that includes foreign central banks, purchased 50.2 percent of the notes, the most since February 2006. At the June sale, they bought 49 percent. The average for the past 10 sales is 29 percent.
Demand has been rising at the U.S. auctions, especially from indirect bidders such as foreign central banks. That class of investors purchased 43.9 percent of the 10-year notes offered yesterday, compared to 34.2 percent at the June sale of the securities. Indirect bidders bought 54 percent of the three-year notes sold on July 7, up from 43.8 percent in June.
Further To Run
The levels of indirect bidders at recent auctions may have been affected by a rule change last month that eliminated a provision allowing some customer awards to be classified as dealer bids.
Yields on 10-year notes touched 4 percent on June 11 on concern the government’s borrowing would deluge demand as the economy showed evidence of emerging from its deepest recession in 50 years.
Since then, yields have fallen nearly 60 basis points as reports suggest the recession has further to run. The Labor Department said last week that the unemployment rate rose to 9.5 percent, the highest since 1983.
Analysts estimate profits for companies in the Standard & Poor’s 500 index fell an average 34 percent in the second quarter and will decrease 21 percent from July through September, according to Bloomberg data.
$1.1 Trillion
Longer maturities have led the Treasury market lower this year as President
Barack Obama borrows record amounts to stimulate the economy and service deficits. After more than doubling note and bond offerings to $963 billion in the first half, another $1.1 trillion may be sold by year-end, according to primary dealer Barclays Plc. The second-half sales would be more than the total amount of debt sold in all of 2008.
Thirty-year bonds handed investors a 21 percent loss so far in 2009, while two-year notes returned 0.6 percent, based on indexes compiled by Merrill Lynch & Co.
The Fed bought $2.999 billion of Treasuries today maturing between July 2010 and April 2011, part of its $300 billion, six- month program to reduce lending rates. The central bank has bought $200.722 billion in U.S. debt through the operations, which began March 25. Today’s purchase is followed by four more over the next two weeks.
Falling Treasury yields have helped the central bank’s mission. The average 30-year mortgage rate dropped to 5.2 percent from 5.32 percent, mortgage buyer Freddie Mac of McLean, Virginia, said today in a statement. That’s the second consecutive weekly decline. The 15-year rate averaged 4.69 percent.
‘Remains Uncertain’
Yields on Treasuries are being artificially suppressed by the central bank; otherwise bonds would yield more than 10 percent, according to
Lee Quaintance and
Paul Brodsky of QB Asset Management in New York.
“There are powerful structural forces blocking any fundamental reconciliation of value,” Quaintance and Brodsky wrote. “These forces include bond markets comprised mostly of domestic and foreign investors with incentives that place them at odds with rational credit pricing, as well as central banks with unlimited spending capacity threatening, and being encouraged by all, to intervene when necessary to provide a ceiling on yields.”
Group of Eight leaders meeting in L’Aquila, Italy, said the recovery from the steepest recession since World War II was too fragile for them to consider reversing efforts to pump money into the economy.
The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.47 trillion of writedowns and credit losses at banks and sent the global economy into its first recession since World War II.
“We note some signs of stabilization in our economies,” the G-8 draft said following the meeting yesterday. “However, the economic situation remains uncertain and significant risks remain to economic and financial stability.”
