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Treasuries Rise as Refuge Demand Bolsters 10-Year Note Auction

By Susanne Walker and Cordell Eddings

July 8 (Bloomberg) -- Treasuries rose as the U.S. sold $19 billion of 10-year notes and investors sought a refuge in government debt amid concern an economic recovery may take longer than anticipated.

The 10-year notes drew a yield of 3.365 percent, lower than forecast, and attracted the most demand from a group of investors that includes foreign central banks since May 2007. The note sale is the third of four this week totaling $73 billion. Traders speculated that company earnings reports scheduled to start today will show profits fell in the second quarter.

“There’s a fairly broad degree of interest in the 10-year note from global and domestic investors,” Lawrence Dyer, an interest-rate strategist in New York at HSBC Securities USA Inc., said before the auction. The firm is one of 17 primary dealers that bid on Treasury auctions. “We are getting immune to the ability of supply to shock anymore.”

The yield on the benchmark 10-year note fell 11 basis points, or 0.11 percentage point, to 3.34 percent at 1:03 p.m. in New York, according to BGCantor Market Data.

The notes sold today were forecast to yield 3.398 percent, according to the average estimate of six bond-trading firms surveyed by Bloomberg News. The offering is the second reopening of the record $22 billion 10-year note sale on May 6, and the securities mature in May 2019. The June sale totaling $19 billion drew a yield of 3.99 percent, which was the highest since August 2008.

Foreign Central Banks

Today’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.28. Investors bid for 2.62 times the amount of debt available at the June sale, versus an average of 2.40 at the previous 10 scheduled auctions.

Indirect bidders, a class of investors that includes foreign central banks, purchased 43.9 percent of the notes. At the June sale, they bought 34.2 percent, higher than the average for the past 10 sales of 27.9 percent.

U.S. stocks fell, sending Standard & Poor’s 500 index to its lowest since April.

“We are seeing money coming out of equities mainly into the belly of the curve, said Paul Horrmann, a strategist in Jersey City, New Jersey, at ICAP Plc, the world’s largest inter- dealer broker. “We are caching a bid here when equities get lower on a small flight to quality trade.”

‘Huge Story’

Demand has been rising at the U.S. auctions, especially from indirect bidders such as foreign central banks. Indirect bidders bought 54 percent of the three-year notes sold yesterday, up from 43.8 percent in June. They purchased 49.7 percent of the Treasury Inflation Protected Securities sold July 6, compared with 26.2 percent at the previous auction in April.

The levels of indirect bidders at recent auctions may have been affected by a rule change last month that eliminated a provision allowing some customer awards to be classified as dealer bids.

After more than doubling note and bond offerings to $963 billion in the first half, President Barack Obama may sell another $1.1 trillion by year-end, according to Barclays Plc, another primary dealer. The second-half sales would be more than the total amount of debt sold in all of 2008.

IMF Forecast

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.47 trillion of writedowns and credit losses at banks and sent the global economy into its first recession since World War II.

The International Monetary Fund said the global economic rebound next year will be stronger than it forecast in April as the financial system stabilizes.

The Washington-based lender said in a revised forecast released today that the world economy will expand 2.5 percent in 2010, compared with its April projection of 1.9 percent growth. A contraction this year will be 1.4 percent, worse than an April outlook for a 1.3 percent drop, the IMF said.

Alcoa Inc., the largest aluminum producer in the U.S., is scheduled to start the earnings season today as the first company in the Dow Jones Industrial Average to report. Analysts estimate profits fell an average 34 percent for companies in the Standard & Poor’s 500 index in the second quarter and will decrease 21 percent from July through September, according to Bloomberg data.

Borrowing Costs

Falling Treasury yields have pushed down consumer borrowing costs. The average rate on a typical 30-year fixed mortgage fell to 5.32 percent yesterday, from a 2009 high of 5.74 percent on June 10, according to North Palm Beach, Florida-based Bankrate.com.

Mortgage applications in the U.S. rose last week as refinancing jumped by the most since March and purchases climbed to the highest level in three months.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 11 percent to 493.1 in the week ended July 3, from 444.8 in the prior week. The group’s refinancing gauge surged 15 percent, while the index of purchases gained 6.7 percent.

A credit-market gauge favored by former Federal Reserve Chairman Alan Greenspan showed the freeze that has gripped banks for the past two years may be all but over by mid-2011.

The Libor-OIS June 2011 forward rate agreement fell to 25 basis points today, a level Greenspan said a year ago he would consider “normal.” The Libor-OIS spread, which compares the three-month dollar London interbank offered rate with the overnight indexed swap rate, was at 32 basis points.

The Fed is scheduled to buy Treasuries due from July 2010 to April 2011 tomorrow, according to the central bank’s Web site, part of its plan to cap borrowing costs by purchasing up to $300 billion of U.S. debt over six months.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

Last Updated: July 8, 2009 13:06 EDT