Brian Edmonds Comments: Treasuries Gain On Auction Demand, Fed Refraining From Action

December 14, 2011, Bloomberg Businessweek

Treasuries rose after the Federal Reserve refrained from taking new actions to boost growth and the refuge appeal of U.S. debt boosted demand to the highest since April 2010 at today’s $21 billion 10-year note auction.

Yields on current 10-year notes reached a two-week low after the sale’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, reached 3.53, the strongest level in 20 months. Concern than Europe’s sovereign- debt crisis is far from a resolution damped risk appetite.

“There is no Fed activity being priced in until 2013,” said Bret Barker, a portfolio manager at Los Angeles-based TCW Group Inc., which manages about $115 billion in assets. “The strength of the 10-year auction has been the driver of price action today.”

The yield on the current 10-year note dropped five basis points, or 0.05 percentage point, to 1.97 percent at 5 p.m. in New York, according to BGCantor Market Data. It touched 1.95 percent, the lowest level since Nov. 25. Earlier the yields rose to 2.06 percent. The 2 percent securities due in November 2021 climbed 13/32, or $4.06 per $1,000 face amount, to 100 10/32. Thirty-year bond yields fell four basis points to 3.01 percent and reached 2.98 percent, the lowest since Nov. 30.

Treasuries extended their advance as the euro slid to as low as $1.3009, the weakest level since Jan. 12. The Standard & Poor’s 500 Index of stocks fell 0.9 percent after rising earlier as much as 1.1 percent.

Risk-Asset Weakness

“There’s general weakness in risk assets,” said Dan Mulholland, a trader in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of the 21 primary dealers that trade with the Fed. “The euro is putting pressure on stocks, and subsequently we’re seeing a rally in Treasuries.”

The U.S. sold $35 billion in four-week bills at a rate of zero percent, the same as at the previous offering on Dec. 6. The bid-to-cover ratio was 7.47, the second highest since Bloomberg data on the sales beginning in 2001. The record, 7.66, was reached at last week’s sale.

The Fed said the economy in the U.S. is maintaining its expansion even as the global economy slows.

“There was not much that was unexpected,” said Brian Edmonds, head of interest rates at the primary dealer Cantor Fitzgerald LP in New York. “There’s nothing new here.”

Today’s Federal Open Market Committee statement reiterated the warning at the Fed’s two previous meetings that “Strains in global financial markets continue to pose significant downside risks to the economic outlook.”

‘Exceptionally Low’

The Fed left unchanged its statement that economic conditions are likely to warrant “exceptionally low” interest rates “at least through mid-2013.” The central bank lowered its target interest rate to a range of zero to 0.25 percent in December 2008.

The central bank said it would continue its exchange of $400 billion of short-term debt with long-term securities to lengthen the average maturity of its holdings on its balance sheet, an effort traders dubbed Operation Twist. The Fed bought $2.3 trillion of bonds in two rounds of quantitative easing from December 2008 to June 2011.

The yield on the 10-year Treasury fell to a record low 1.72 percent on Sept. 22, the day after the central bank announced the maturity-lengthening program.

Treasuries fell earlier today as Europe’s bailout fund sold the maximum amount at its first auction of bills, reducing refuge demand. They briefly pared declines after German Chancellor Angela Merkel rejected raising the upper limit of funding for another rescue mechanism.

10-Year Auction

U.S. 10-year notes at today’s auction yielded 2.020 percent, compared with a forecast of 2.050 percent in a Bloomberg News survey of seven primary dealers. The September sale yielded a record low 2 percent.

Indirect bidders, an investor class that includes foreign central banks, purchased 61.9 percent of the notes today, compared with an average of 46.7 percent for the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.4 percent, versus a 10-sale average of 10.1 percent.

“Clearly investors like Treasuries at these levels, given continued concern about risk assets headed into the end of the year as concern about a weakening Europe and economy remains,” said Scott Graham, head of government-bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago, a primary dealer.

Debt Supply

The U.S. is selling $78 billion in notes, bonds and inflation-indexed debt this week. It will auction $13 billion of 30-year debt tomorrow and $12 billion of five-year Treasury Inflation-Protected Securities on Dec 15. It sold $32 billion in three-year notes yesterday to a bid-to-cover ratio of 3.62, a record for the maturity.

The European Financial Stability Facility issued 1.97 billion euros ($2.6 billion) of 91-day bills at an average yield of 0.2222 percent, the Bundesbank said. Investors bid for 3.2 times the amount sold, the German central bank said. The EFSF sells debt to finance rescue loans extended to Europe’s high debt and deficit nations.

Treasury yields stayed higher earlier after government data showed U.S. retail sales rose 0.2 percent in November, the least in five months. A Bloomberg survey forecast a 0.6 percent increase. Recent reports have shown U.S. unemployment fell, manufacturing picked up and consumer confidence climbed.

“The economy is still in a tenuous position,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “It wouldn’t take too much to derail what’s happening.”