Bloomberg: U.S. 2-Year Yields Highest Since October After $44 Billion Sale

U.S. 2-Year Yields Highest Since October After $44 Billion Sale
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By Daniel Kruger

Dec. 28 (Bloomberg) -- Treasury two-year note yields reached the highest levels since October as an investor class that includes foreign central banks bought the least of the debt in five months at today’s record-tying $44 billion auction.

Indirect bidders purchased 34.8 percent of the notes, the lowest amount since July, and below the average for the past 10 sales of 45 percent. Treasuries of all maturities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes. That would be the worst performance since at least 1978, when Merrill began collecting the data.

“We’re in a thin week,” said Ray Remy, head of fixed income in New York at Daiwa Securities America Inc., one of 18 primary dealers that are required to bid at Treasury auctions. “It’s a pretty big auction on a Monday on a holiday-shortened week.”

The yield on the current two-year note rose six basis points to 1.03 percent at 1:29 p.m. in New York, according to BGCantor Market Data. The yield touched 1.03 percent, the highest level since October 27. The 0.75 percent security maturing in November 2011 fell 3/32, or 94 cents per $1,000 face amount, to 99 1/2.

The securities sold today drew a yield of 1.089 percent, the highest level since August, compared with the forecast of 1.059 percent in a Bloomberg News survey of four of the Federal Reserve’s 18 primary dealers.

Yield Curve

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.91, the lowest since August. The average at the last 10 auctions was 2.96. Last month’s sale drew a record-low yield of 0.802 percent and a bid-to-cover ratio of 3.16.

The difference in yields between 2- and 10-year notes, at 2.83 percentage points today. reached a record 2.88 percentage points on Dec. 22 amid concern President Barack Obama’s attempt to revive economic growth with record spending will keep the deficit at $1 trillion and damp demand at government debt auctions.

The previous record spread of 2.81 percentage points was set on June 5, when Treasuries plunged after a government report showed the smallest decline in U.S. payrolls in eight months. Ten-year note yields touched 4 percent the following week, the highest level in 2009.

The U.S. will sell $42 billion in five-year debt tomorrow and $32 billion in seven-year securities on Dec. 30. The five- year sale and seven-year offerings equal the all-time highest issues of the securities, set last month.

‘Fiscal Worries’

“Fiscal worries are also very much present in the U.S., and higher U.S. yields are also a reflection of such concerns,” said Sebastien Barbe, a Hong Kong-based strategist at Calyon, the investment-banking unit of Credit Agricole SA.

Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year.

Yields on 10-year notes will climb to 5.5 percent, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

Investors are demanding higher returns on government debt, boosting rates this month by the most since January. Rising borrowing costs risk jeopardizing a recovery from a plunge in the residential mortgage market that led to the worst global recession in six decades.

“When you take these kinds of aggressive policy actions to prevent a depression, you have to clean up after yourself,” Greenlaw said in a telephone interview. “Market signals will ultimately spur some policy action, but I’m not naive enough to think it will be a very pleasant environment.”