Treasuries Gain as Debt Auctions Attract Most Demand This Year

By Dakin Campbell and Susanne Walker

June 13 (Bloomberg) -- Treasury notes gained for the first time in a month as the highest yields since October helped attract the most investor demand this year at the government’s three auctions of $65 billion in notes and bonds.

Yields on 10-year notes fell after Japanese Finance Minister Kaoru Yosano said yesterday that his nation’s confidence in U.S. securities is "unshakable." A class of investors that includes foreign central banks bought a greater- than-average amount of U.S. debt at the Treasury’s sales this week. Government securities tumbled earlier in the week after Russia said it may switch some reserves from Treasuries.

"This week was about getting the market to levels where it could attract some buyers," said James Combias, head of Treasury trading in New York at Mizuho Securities USA Inc., one of 16 primary dealers required to bid at government auctions. "Central banks have clearly been better buyers all week."

The yield on the 10-year note fell four basis points on the week, or 0.04 percentage point, to 3.79 percent, according to BGCantor Market Data. The 3.125 percent security due May 2019 rose 10/32, or $3.13 cents per $1,000 face amount, to 94 17/32.

Ten-year note yields reached 4 percent on June 11, the highest since October. Thirty-year bond yields finished at 4.64 percent, little changed from the previous week. The yield touched 4.8391 percent on June 11, the highest since October 2007. ’Our Trust’

Four percent on the 10-year note "triggered some decent buying," said Michael Pond, an interest-rate strategist in New York at primary dealer Barclays Capital Inc.

Brazil and Russia joined China in saying they would shift some $70 billion of currency reserves into bonds issued by the International Monetary Fund. Concern foreign central banks would diversify away from U.S. assets was allayed by the comments from Japan’s finance minister.

"The U.S. dollar’s position as the world’s reserve currency isn’t under threat," Yosano, 70, said in an interview in Tokyo on June 10 before attending a Group of Eight nations meeting of finance ministers starting today in Italy. "Our trust in U.S. Treasuries is absolutely unshakable."

At this week’s auctions, indirect bidders bought 49 percent of 30-year bonds on offer, the biggest percentage since the Treasury reintroduced the security in 2006. Investors bought 34.2 percent of the 10-year sale, the most since February, and 43.8 percent of the three-year note sale, the most since the Treasury resumed selling the security in November.

Put On Notice

"The foreign bid is still there," said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.

Leaders of Brazil, Russia, India and China, the so-called BRIC countries, are scheduled to meet on June 16 in Russia to discuss their economies.

Mark Mobius, who oversees $20 billion of emerging-market assets at Templeton Asset Management Ltd. in Singapore, said the real focus of the BRIC agenda is the U.S.’s projected $1.85 trillion deficit for 2009 and the $787 billion economic-stimulus plan signed by President Barack Obama in February. Both are sparking fears among creditors that the dollar will fall and inflation will accelerate.

"The BRICs are putting the U.S. on notice that there has to be a cutback on spending and get their house in order," Mobius said in a telephone interview.

China is the largest U.S. creditor, holding $767.9 billion of U.S. debt as of March, according to Treasury Department figures. Japan is second with $686.7 billion. Brazil holds $126.6 billion, while Russia has $138.4 billion.

Foreign Purchases

A Treasury Department report next week may show the international demand for long-term U.S. equities, notes and bonds rose to a net $57.5 billion in April, compared with $55.8 billion in March. The report is due June 15.

The sell-off that drove benchmark yields to 4 percent this month left the market down 6.2 percent so far in 2009, according to Merrill Lynch & Co.’s U.S. Treasury Master index. The securities haven’t posted an annual decline since 1998, according to the index.

Obama is selling a record amount of debt to try to end the steepest U.S. recession in 50 years and service surging deficits. The government may borrow a record $3.25 trillion in the fiscal year ending Sept. 30, almost four times 2008’s $892 billion, according to primary dealer Goldman Sachs Group Inc.

The Treasury’s next auctions of notes are scheduled to begin June 23. The department will sell 2-, 5- and 7-year securities over three consecutive days.

Increased Volatility

Rising yields are undermining Fed Chairman Ben S. Bernanke’s efforts to cap consumer borrowing costs. Ten-year yields have risen 126 basis points since the Fed announced its $300 billion, six-month Treasury purchase program on March 18. The average 30-year mortgage rate jumped to 5.59 percent this week from 5.29 percent the week before, according to Freddie Mac, the McLean, Virginia-based mortgage buyer.

Volatility in U.S. debt has increased along with yields. Merrill Lynch & Co.’s MOVE Index, which measures price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, reached 190.30 on June 1, the highest level in 2009, from this year’s low of 105.60 on April 15. The index was at 171.70 on June 11.

The central bank is slowing its pace of Treasury purchases as traders speculate rising yields may force it to accelerate the acquisitions. The Fed announced that it will buy Treasuries four times over the next two weeks, the second consecutive two- week period of four so-called coupon passes. That’s down from five operations held during four of the five prior two-week periods since the program to buy debt to help lower borrowing costs began on March 25.

The rise in longer-maturity securities narrowed the yield difference between 10-year and two-year notes to 2.52 percentage points, down from a record 2.81 percentage points set on June 5.

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net.