U.S. 30-Year Yields Reach Four-Month High as Auctions Increase

March 14 (Bloomberg) — Treasury 30-year bond yields touched the highest in almost four months as the pace of debt sales by the government accelerated and stocks posted the biggest weekly gain since November, lessening the refuge appeal of U.S. debt.

Yields on the longest maturity government security rose as the Treasury sold $63 billion in securities this week, including $11 billion in bonds. Shorter-maturity debt was little changed as the cost of borrowing in dollars approached the highest level of the year as bank hoarded cash and governments struggled to thaw credit markets.

“It’s more a supply story than anything else,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. In addition, “‘we haven’t seen stocks rally like we did this week in a long time.”

Thirty-year yields increased six basis points since March 6 week to 3.67 percent. The yield touched 3.77 percent on March 11, the highest since Nov. 25.

Yields on the 0.875 percent notes due in February 2011 rose two basis points to 0.96 percent this week, according to BGCantor Market Data. The price dropped 1/32, or 31 cents per $1,000 face value, to 99 27/32. Two-year note yields declined five basis points yesterday.

Treasury 10-year note yields rose two basis points in the past five days to 2.89 percent.

Bond Auction

The 30-year bond auctioned on March 12 was sold at a yield of 3.64 percent, the highest level at a sale of the maturity in four months. It was still lower than the 3.688 percent yield traders anticipated in a Bloomberg News survey before the sale.

The so-called bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, was 2.40, indicating stronger demand. At the Treasury’s last sale of the bonds, on Feb. 12, the ratio was 2.02; the average for the past 10 sales is 2.18.

The Treasury also sold a record $34 billion in three-year notes and $18 billion in 10-year securities this week.

“It is a positive sign for Treasuries that we had so much supply this week and it went well,” said Nils Overdahl, a bond- fund manager at New Century in Bethesda, Maryland, which oversees $500 million. “It speaks volumes about the market’s ability to absorb the supply. People have very short-term investment time horizons. As a result, the natural parking place is Treasuries.”

Stock Rally

The U.S. debt sales will almost triple this year to a record $2.5 trillion, according to estimates by Goldman Sachs Group Inc.

President Barack Obama is asking Congress to pass a budget with record $1.75 trillion deficit in the year ending Sept 30, and is seeking congressional approval for a budget of $3.55 trillion for the fiscal year starting Oct. 1.

The Standard & Poor’s 500 Index gained 11 percent this week, its biggest increase in three months, spurred by gains in the finance sector and rally in global equities. The Dow Jones Industrial Average rose 8.8 percent.

Shares of Citigroup Inc. once the world’s biggest bank by market value, surged 73 percent this week after Chief Executive Officer Vikram Pandit said the bank is having the best quarter since 2007. Citigroup had dropped below $1 in New York trading early this month. It logged five quarters of losses, totaling more than $37.5 billion.

“That rally in equities would typically have been negative for Treasuries because it would have signaled a willingness to take risk,” said John Canavan, a fixed-income strategist at Stone & McCarthy Research Associate in Princeton, New Jersey. “We didn’t really see that, despite how well equities performed. Treasuries still held in there. The market responded relatively well.”

Borrowing Costs

Short-term borrowing costs are increasing for companies and consumers as banks hoard cash and governments struggle to thaw credit markets after finance companies reported more than $1.2 trillion of writedowns and losses since the start of 2007.

The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans, crept as high as 1.33 percent this week, the highest level since Jan. 8, the British Bankers’ Association said. The premium banks charge each other for short-term loans, the so-called Libor-OIS spread, has remained above 1 percentage point since Feb. 19 after staying below that threshold since Jan. 9.

The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, widened to 1.13 percentage points this week from 1.09 basis points on March 6. The spread averaged 0.27 percentage point from 2002 through 2006.

To contact the reporter on this story: Molly Seltzer in New York at mseltzer4@bloomberg.net

Last Updated: March 14, 2009 08:00 EDT
By Molly Seltzer

Source: Bloomberg

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