Treasuries Fall as 30-Year Bond Sale Yield Exceeds Forecast

By Cordell Eddings and Susanne Walker - Nov 10, 2010 2:26 PM PT

(Bloomberg)--Treasuries rose after the Federal Reserve announced plans to buy $105 billion of debt during the next 30 days and the Treasury completed $72 billion in sales of notes and bonds. The benchmark 10-year note erased declines as the central bank offered details of its expanded policy of quantitative easing to bolster the economy. Thirty-year bond yields fluctuated after touching a six-month high as a $16 billion auction of the securities drew a bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, of 2.31, the lowest since November 2009.

“The auctions are out of the way, they came on the cheap side and now, after everything, the Fed is still buying,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “The biggest seller, the Treasury, has left the market, and the biggest buyer, the Fed, is getting ready to start, and that has brought some strength back into the market.” The benchmark 10-year note yield fell three basis points to 2.64 percent at 5:22 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent notes due in November 2020 rose 18/32, or $5.63 per $1,000 face amount, to 99 29/32. Two-year note yields fell two basis points to 0.43 percent after touching 0.48 percent, the highest since Sept. 17.

Yield Rise

The yield on the current 30-year bond fell two basis points to 4.23 percent. The yield earlier touched 4.33 percent, the highest since May 18 and has increased 11 basis points so far this week. The central bank will conduct 18 open-market operations from Nov. 12 through Dec. 9, according to a statement on the New York Fed’s website. The central bank is buying an additional $600 billion of Treasuries through June and expects to reinvest $250 billion to $300 billion of proceeds from mortgage-backed debt and agency securities into Treasuries.

“Due to holidays and other scheduling tasks, the $105 billion for the first cycle will be front-loaded into this Friday to next Friday rather than being smoothly distributed over calendar time,” Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients. “The initial maturity ranges of the first several purchases also skew a little longer than the average for the next four weeks.”

Spread View

The yield difference between Treasury 10-year notes and 30- year bonds was 159.7 percentage points, an all-time high. The spread has averaged 52.8 percentage points since the start of 2000. More than $442 billion of Treasuries changed hands today through ICAP Plc, the most since September 2008 as of 4 p.m. in New York, according to data from the world’s largest inter- dealer broker. The average daily volume during the past three months is $285 billion.

“The Fed is going to be a presence in our market just about every day for the next 30 days,” said John Briggs, a U.S. government bond strategist at Royal Bank of Scotland Plc’s RBS Securities unit in Stamford, Connecticut, one of 18 primary dealers that trade with the Fed. “What the market’s doing is finally getting it in front of their eyes again, whereas we’d had supply all week and a tenuous 30-year auction. Now we have the Fed buybacks, and one is as soon as Friday.”

Auction Results

In the 30-year bond auction, indirect bidders, a class of investors that includes foreign central banks, bought 38.4 percent of the securities today, compared with 32.4 percent of the bonds at the October auction and an average for the past 10 sales of 35.03 percent. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 10.8 percent of the bonds, compared with an average of 17.8 percent for the past 10 offerings.

“We cheapened all day and it still wasn’t enough to take down the supply well,” said George Goncalves, head of interest- rate strategy at Nomura Holdings Inc., a primary dealer. “This is not setting a good tone to the market after what were two good auctions. It’s a warning signal that there are real concerns about the Fed’s policy, and they are manifesting themselves.” Thirty-year bonds have returned 9.9 percent this year, compared with 8.1 percent for the overall Treasury market as of yesterday, according to Bank of America Merrill Lynch indexes.

The Treasury sold $24 billion of 10-year notes yesterday at a yield of 2.636 percent, compared with the average forecast of 2.644 percent in a Bloomberg News survey. The Treasury Nov. 7 sold $32 billion in three-year debt at a yield of 0.575 percent, compared with the 0.577 percent average forecast in a Bloomberg News.

The bond market is closed tomorrow in observance of Veterans Day.