Treasuries Gain After Record Low Yield at Sale Amid Haven Demand
By Susanne Walker and Cordell Eddings
June 13, 2012

U.S. government securities climbed as concern Europe’s sovereign-debt crisis is worsening and a drop in U.S. retail sales sent 10-year note yields to a record low at a $21 billion sale of the security.

Treasuries also gained as Spain’s credit rating was cut by Moody’s Investors Service and the firm said it may be reduced further. The 10-year notes sold today yielded 1.622 percent, compared with a forecast of 1.647 percent in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers. The Fed bought $4.76 billion of Treasuries due from August 2020 to February 2022 as part of its effort to keep borrowing costs low.

“It’s really fear, European fears,” said Thomas Roth, senior trader in New York at Mitsubishi UFJ Securities USA Inc. “Asians fear the U.S. will become another Japan and the 10-year will drop to 1 percent. It was a good auction; there was good customer demand.”

The yield on the 10-year note slid seven basis points, or 0.07 percentage point, to 1.59 percent at 5:10 p.m. in New York, after rising earlier as much as three basis points, according to Bloomberg Bond Trader data. It reached a record low of 1.4387 percent in trading on June 1. The price of the 1.75 percent securities due in May 2022 increased 21/32, or $6.56 per $1,000 face amount, to 101 14/32.

Thirty-year bond yields decreased six basis points to 2.71 percent after rising five basis points earlier.
U.S. 10- and 30-year securities erased early losses after U.S. retail sales fell for a second straight month, spurring investor demand for safety.

Foreign Banks

Ten-year U.S. debt has returned 3.4 percent this year, more than double the 1.6 percent gain in the broader Treasury market. The notes returned 17 percent in 2011, compared with a 9.8 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes.

At today’s auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 3.06, versus 2.9 percent at the May offering and an average of 3.08 at the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 42 percent of the securities at the offering, the most since December. That compared with an average of 41.5 percent for the past 10 sales of 10-year notes.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 20.8 percent, compared with an average of 14.7 percent at the past 10 sales. Their share today was the highest since August.

The previous record low yield at a 10-year note offering was 1.855 percent last month.

Bond Auction

The U.S. will auction $13 billion of 30-year bonds tomorrow after a $32 billion three-year note sale yesterday that drew a yield of 0.387 percent. That compared with a forecast of 0.383 percent in a Bloomberg survey of seven primary dealers.

“The relentless purchasing of Treasuries astounds me,” said Paul Montaquila, head of fixed-income trading at Bank of The West in San Ramon, California. “The uncertainty in Europe is an ever-lingering backdrop.”

Spain and Italy appealed to European policy makers to step up their response to the crisis after a 100 billion-euro ($125 billion) lifeline for Spanish banks failed to calm markets.

Spain’s credit rating was cut to Baa3 from A3 by Moody’s, which cited the nation’s increased debt burden, weakening economy and limited access to capital markets. Egan-Jones Ratings Co. earlier reduced the country’s rating to CCC+ from B, the firm said today in an e-mailed statement.

Sales Decline

U.S. retail sales fell in May, Commerce Department figures showed in Washington, as slower employment and subdued wage gains damped demand. The report fueled speculation the Fed may move to spur growth.

Sales decreased 0.2 percent followed a similar decline in April that was previously reported as a gain,. Sales excluding automobiles slumped by the most in two years.

“The Federal Open Market Committee is certainly going to have to address that number,” Bank of The West’s Montaquila said. “The Fed may be enticed to do something. As soon as you see something crack domestically, it fuels buying.”

The U.S. central bank, which meets June 19-20, purchased Treasuries today under a program known as Operation Twist. It’s seeking to replace $400 billion of shorter-term securities in its holdings with longer-term bonds through this month to keep borrowing costs down.

Quantitative Easing

The Fed bought $2.3 trillion of bonds from December 2008 to June 2011 in two rounds of a tactic called quantitative easing, seeking to cap borrowing costs and stimulate the economy.

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for inflation over the life of the securities, touched 2.10 percentage points, compared with the 2012 high of 2.45 percentage points in March. The average over the past 10 years is 2.15 percentage points.

“We’re clearly in a downswing in inflation,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., which as a primary dealer is obliged to bid at U.S. debt auctions. “There’s very little sign of strength.”

A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, which gauges the average inflation rate between 2017 and 2022, was 2.52 percent on June 11, down from a 2012 high of 2.78 percent on March 19 and a five-year average of 2.8 percent.


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