Treasuries fall amid doubts on demand, failed UK bond auction


By Dakin Campbell and Susanne Walker
Bloomberg News
Wednesday, March 25, 2009

NEW YORK -- Treasury notes fell for a fifth day after an auction of $34 billion in five-year notes drew a higher-than-forecast yield, spurring concern record sales of U.S. debt are overwhelming demand.

U.S. securities dropped even after the Federal Reserve today bought $7.5 billion of Treasury notes, its first targeted purchases of U.S. securities since the early 1960s. The five-year auction drew a yield of 1.849 percent.

"This caught a lot of people unaware," said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas Securities Corp., one of the 16 primary dealers that are required to bid at Treasury auctions. "Prior to the auction the Fed conducted its purchases of Treasuries, which may have compressed interest rates below where they would have been otherwise."

The 10-year note yield rose six basis points, or 0.06 percentage point, to 2.77 percent at 3:10 p.m. in New York, according to BGCantor Market Data. The price of the 2.75 percent security due in February 2019 fell 17/32, or $5.31 per $1,000 face amount, to 99 27/32.

The 30-year bond yield gained eight basis points to 3.71 percent, while the current five-year note yield appreciated seven basis points to 1.80 percent.

Eight trading firms surveyed by Bloomberg News before the auction forecast the five-year to draw a yield of 1.801 percent. The bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, fell to 2.02 from an average 2.18 at the previous 10 sales.

The Treasury Department is scheduled to sell $24 billion of seven-year securities tomorrow after auctioning $40 billion of two-year notes yesterday. The U.K. failed to attract enough bidders today at an auction of 1.75 billion pounds ($2.55 billion) of gilts for the first time in almost seven years.

President Barack Obama's government is selling record amounts of debt to revive economic growth, service deficits, and cushion the failures in the financial system. Debt sales will almost triple this year to a record $2.5 trillion, according to estimates from Goldman Sachs Group Inc.

Orders for U.S. durable goods unexpectedly rose by 3.4 percent in February on a rebound in demand for machinery, computers and defense equipment, the Commerce Department said today in Washington. Purchases of new homes in the U.S. unexpectedly rose in February, increasing 4.7 percent to an annual pace of 337,000 after a 322,000 rate in January, Commerce said.

"Better than expected economic data, failure of the long- end auction in the U.K., and low demand at the five-year Treasury auction -- all these factors combined are leading to higher yields," said Anshul Pradhan, an interest-rate strategist in New York at Barclays Capital Inc., another primary dealer.

The Fed purchased $7.5 billion of U.S. debt spread among 13 of the possible 19 securities eligible for purchase, it said. The notes mature from February 2016 to February 2019, the Federal Reserve Bank of New York said in a statement today. Nearly $22 billion was submitted to the central bank in the first day of buying, the New York Fed said.

"We are really not seeing any kind of meaningful support for the Treasury market," said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley's individual investor clients. "Conventional wisdom in the market is that the Fed will concentrate on the five-to10-year or the seven- to-10-year sector."

The Fed joins central banks in the U.K. and Japan in extraordinary purchases of government debt. U.S. policy makers announced the decision last week to buy $300 billion of government debt in the next six months along with a plan to more than double purchases of housing debt to $1.45 trillion, hoping to reduce rates on home loans.

The dollar fell the most in almost a week against the euro on concern Treasury Secretary Timothy Geithner supported a Chinese plan to blunt demand among global central banks for the U.S. currency. The U.S. currency weakened as much as 1.2 percent to $1.3651 per euro, the biggest intraday decline since March 19, before trading at $1.3574 at 2:55 p.m. in New York.

Geithner later affirmed the dollar's role as the world's reserve currency.

"The poor communication from the Treasury department has complicated the market for Treasuries," said Jeffrey Caughron, chief market analyst in Oklahoma City at Baker Group, which advises community banks investing $20 billion of assets.

The U.K.'s effort to buy government debt wasn't enough to prevent today's failed auction of 40-year gilts, the first time that the government failed to attract enough bids at a sale of nominal debt since 1995. Investors bid for 1.63 billion pounds ($2.4 billion) of 4.25 percent notes, less than the 1.75 billion pounds offered.

"The failed gilt auction doesn't bode well for Treasuries," said Michael Franzese, head of government bond trading for Standard Chartered in New York.

Average 30-year fixed mortgage rates were about 2.29 percentage points more than 10-year Treasury yields, versus 1.57 percentage points five years ago. Mortgage rates declined to 4.98 percent in the week ended March 19, according to Freddie Mac, the mortgage-finance company under U.S. government control.

Treasuries lost 1.68 percent this year, according to Merrill Lynch & Co.’s Treasury Master Index. U.S. debt was down 3.4 percent before the Fed announced its purchase program last week.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 1.04 percentage point from 91 basis points on Feb. 10. It reached a two-month high of 1.13 percentage point on March 13. The spread averaged 36 basis points in 2006 before credit markets began to decline the next year.

* * *

Join GATA here:

Bahamas Investment Conference
Thursday-Friday, March 26-27, 2009
Atlantis Resort and Casino, Nassau

* * *

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

To contribute to GATA, please visit: