Brian Edmonds Comments: Treasury Yields Reach 3-Month Lows After Auction Demand
May 9, 2012, Bloomberg News
Treasuries rose, with yields falling to a three-month low, as Greece's struggle to form a government bolstered demand at a $32 billion U.S. three-year note auction to the highest level since January.
The bid-to-cover ratio on the notes, which gauges demand by comparing total bids with the amount of securities offered, was 3.65. Thirty-year bond yields touched the lowest level since February as Greece faced the prospect of becoming the first developed nation to default on its debt, two months after forcing through the biggest-ever sovereign bond restructuring. The U.S. will sell $24 billion in 10-year notes tomorrow and $16 billion of bonds the next day.
“It's the risk-aversion trade,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Federal Reserve. “The market was well bid on fears out of Europe.”
The yield on the current three-year note fell one basis point, or 0.01 percentage point, to 0.36 percent, at 4:59 p.m. in New York, according to Bloomberg Bond Trader Prices. The 0.375 percent securities maturing in April 2015 rose 1/32, or 31 cents per $1,000 face amount, to 100 2/32.
The yield on the benchmark 10-year note fell three basis points to 1.84 percent, after touching the least since Feb. 3. Thirty-year bond yields lost three basis points to 3.03, also reaching the lowest level since Feb. 3.
‘Ham-on-Rye'
Valuation measures show Treasuries are near the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.75 percent, close to the most expensive level ever of 0.79 percent reached on Feb. 2. A negative reading indicates investors are willing to accept yields below what's considered fair value.
The securities sold today drew a yield of 0.362 percent, compared with a forecast of 0.365 percent in a Bloomberg News survey of seven of the Fed's primary dealers.
“It's ham-on-rye,” said Thomas Roth, senior trader in New York at Mitsubishi UFJ Securities USA Inc. “Given what's going on with Europe again, there was pretty good demand. With fear out there, it's probably a good point for people to put their money. At least you know you are getting it back.”
Indirect bidders, an investor class that includes foreign central banks, purchased 35.7 percent of the notes, compared with an average of 37.5 percent for the past 10 sales.
Auction Detail
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 11.2 percent of the notes at the sale, the most since November and compared with an average of 10.3 percent for the past 10 auctions.
Three-year notes have returned 0.2 percent this year, compared with a 0.4 percent gain for Treasuries overall, according to Bank of America Merrill Lynch indexes.
The Treasury is selling $72 billion in notes and bonds this week. The sales will raise $35.3 billion of new cash as maturing securities held by the public total $36.7 billion, according to the U.S. Treasury.
“Tens and bonds are riskier on the curve,” said Roth of Mitsubishi UFJ. “If you are just looking to park money, you are not doing it in the 10-year or the bond.” The yield curve measures the difference between short- and long-term interest rates.
Greece Politics
Treasuries were supported as Greece's political leaders are struggling to form a coalition government after voters turned to anti-bailout parties at the May 6 election, calling into question the country's ability to impose the measures needed to guarantee its future in the euro.
Alexis Tsipras, whose Syriza party placed second in Greek elections on May 6, said he would forge ahead with plans to form a coalition government of left-wing parties after he was handed the mandate by President Karolos Papoulias.
The difference between the 10-year swap rate and the yield on similar-maturity U.S. debt widened to as much as 15.75 basis points, the most since Jan. 13. Swap rates are usually higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk. Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.
Treasuries investors reduced bets the securities will advance and raised neutral positions to the highest in a month, according to a weekly survey by JPMorgan.
The proportion of “net longs” was cut to zero from six percentage points last week as the level of outright longs dropped to equal the level of outright shorts that was unchanged at 17 percent. A long position is a bet that an asset will increase in value, while a short is a wager it will decrease.
Ten-year yields will climb to 2.25 percent by the end of the second quarter, according to analysts' forecasts compiled by Bloomberg. They will rise to 2.52 percent by year-end, a separate survey shows.
