Treasuries Gain as Rising Crude Oil Spurs Demand at U.S. 10-Year Auction


Treasuries Gain as Rising Crude Oil Spurs Demand at U.S. 10-Year Auction 
Treasuries advanced as concern rising fuel costs caused by Libya’s uprising will slow economic expansion bolstered demand at the government’s $21 billion sale of 10-year notes to the highest since April.

Benchmark 10-year yields dropped the most in more than two weeks as crude oil traded near the highest level in more than two years and stocks fluctuated. The Federal Reserve bought $6.7 billion of Treasuries due from April 2015 to May 2016 to keep borrowing costs low.

“The price action speaks for itself,” said Gary Pollack, who oversees $12 billion as head of fixed-income trading at Deutsche Bank AG’s private wealth management unit in New York. “The main factor that’s been influencing the Treasury market these last couple of weeks is higher oil prices and the possible negative impact on economic growth.”

The yield on the 10-year note dropped eight basis points, or 0.08 percentage point, to 3.47 percent at 3:43 p.m. in New York, according to BGCantor Market Data. The price of the 3.625 percent security due in February 2021 climbed 22/32, or $6.88 per $1,000 face amount, to 101 9/32.

The 10-year note yield earlier decreased 10 basis points, the most since Feb. 22. It slid almost five basis points in the hour before the auction results were announced at 1 p.m.

The securities in today’s offering produced a yield of 3.499 percent, compared with the average forecast of 3.535 percent in a Bloomberg News survey of 8 of the 20 primary dealers that trade directly with the Fed.

Auction Demand

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.32, the highest since the April 7 offering.

“The market was surprised by the strength of the auction, and we may see some follow-through if we stay at these yield levels,” said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies Group Inc., which as a primary dealer is obligated to participate in U.S. debt auctions.

Indirect bidders, an investor class that includes foreign central banks, purchased 53 percent of the notes, compared with an average of 49.2 percent for the past 10 sales and a record high 71.3 percent at the Feb. 9 auction

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 6.5 percent of the notes, compared with the 10-auction average of 10.6 percent.

Demand rose at yesterday’s $32 billion three-year note auction, with investors submitting bids for 3.22 times the amount of debt on offer, the most since November. The government plans to sell $13 billion of 30-year securities tomorrow for a total of $66 billion in notes and bonds this week.

U.S. Note Losses

U.S. 10-year notes have lost 1.3 percent this year, compared with a 0.6 percent drop for the broader Treasury market, according to Bank of America Merrill Lynch indexes.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship $237 billion Total Return Fund.

The portfolio last held zero government-related debt in January 2009. Gross had cut the holdings to 12 percent of assets in January, the Newport Beach, California-based company’s website said. The fund’s net cash-and-equivalent position surged to 23 percent, the highest since May 2008, from 5 percent.

Yields on Treasuries may be too low to sustain demand for U.S. government debt as the Fed approaches the end of its second round of quantitative easing, Gross wrote in a monthly investment outlook posted on Pimco’s website on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels.

Gross on Yields

Treasury yields are about 150 basis points too low when viewed in a historical context and compared with expected nominal gross domestic product growth of 5 percent, Gross wrote in the commentary. The Fed is scheduled to complete purchases of $600 billion of Treasuries in June.

Government bonds rose earlier as oil advanced Libya’s Muammar Qaddafi stepped up attacks on insurgents. Oil fell later today as supplies surged at Cushing, Oklahoma, the delivery point for West Texas Intermediate, the U.S. benchmark grade.

Crude oil for April delivery dropped 1 percent to $103.97 a barrel on the New York Mercantile Exchange after touching $106.95 on March 7, the highest intraday price since Sept. 26, 2008. Futures are up 28 percent from a year ago.

U.S. stocks swung between gains and losses as violence in Libya tempered optimism that the biggest equity rally since 1955 will be extended into a third year. The Standard & Poor’s 500 Index dropped almost 0.1 percent.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, increased to 2.57 percentage points yesterday, the widest in 32 months. The spread slipped to 2.52 today.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
http://www.bloomberg.com/news/2011-03-09/treasuries-gain-as-rising-crude-oil-spurs-demand-at-u-s-10-year-auction.html
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