Treasuries Little Changed Before Record $44 Billion 2-Year Sale
Oct. 27 (Bloomberg) -- Treasuries were little changedbefore a $44 billion sale of two-year notes, part of a recordauction of debt this week by the U.S. government.
The yield on the two-year note touched 1.0328 percent, tiedfor the highest level this month before the sale, the second offour auctions this week amounting to $123 billion. The TreasuryDepartment plans to sell $41 billion of five-year notes tomorrowand $31 billion of seven-year securities in two days. Homeprices in 20 U.S. cities rose in August for a third consecutivemonth. A separate report is forecast to show consumer confidenceimproved in October.
“The auctions will be heavily watched,” said ChristianCooper, an interest-rate strategist at RBC Capital Markets inNew York, one of 18 primary dealers that trade with the centralbank. “A large concession hasn’t occurred but as the frequencyof these auctions increases, it seems like more and more theconcession has already been priced in.”
The yield on the 10-year note fell one basis point, or 0.01percentage point, to 3.54 percent at 9:31 a.m. in New York,according to BGCantor Market Data. The 3.625 percent securitymaturing in August 2019 rose 3/32, or 94 cents per $1,000 faceamount, to 100 22/32. The yield touched 3.58 percent yesterday,the highest level since Aug. 24. The two-year note yield fellone basis point to 1.01 percent.
Home Values
The S&P/Case-Shiller home-price index climbed 1 percentfrom the prior month on a seasonally adjusted basis after a 1.2percent increase in July, the group said today in New York. Froma year earlier, the gauge was down 11.3 percent, less thanforecast.
An index of consumer sentiment rose to 53.5, from 53.1 inSeptember, a report from the Conference Board will show,according to a separate survey.
A collapse in the U.S. housing industry triggered theglobal financial crisis. The 2007 property slump froze bondmarkets last year and led to $1.66 trillion of writedowns andcredit losses at banks and other financial institutions,according to data compiled by Bloomberg.
President Barack Obama has increased U.S. marketable debtto a record $7.01 trillion as he borrows unprecedented amountsto battle the steepest recession since the 1930s.
Total sales of Treasuries will increase to $2.38 trillionin the fiscal year that began Oct. 1, from $1.81 trillion in theprior 12 months, Goldman Sachs Group Inc. said in a report onOct. 20. Goldman Sachs, based in New York, is one of the 18primary dealers that are required to bid at the government debtauctions.
Record Sales
The sizes of this week’s sales are raising speculationinvestors will demand higher yields before bidding.
“There’s too much supply,” said Takashi Yamamoto, chieftrader in Singapore at Mitsubishi UFJ Trust & Banking, a unit ofJapan’s biggest bank. “There is a little more room for yieldsto rise.”
The two-year notes scheduled for sale today yielded 1.082percent in pre-auction trading, versus 1.034 percent the lasttime the securities were sold on Sept. 22.
Investors bid for 3.23 times the amount of debt on offerlast month, the most since September 2007.
Indirect bidders, the category of investors that includesforeign central banks, purchased 45.2 percent of the notes,versus an average of 42.6 percent for the past 10 sales.
Two-year notes have returned 0.9 percent in 2009, versus a3.4 percent loss for the whole Treasury market, according toindexes compiled by Merrill Lynch.
Pellegrini Shorts
Paolo Pellegrini, who helped make more than $3 billion atNew York-based hedge-fund Paulson & Co. with wagers on the U.S.housing crash, said shorting long-term U.S. debt is the “onlyattractive bet.”
“I always like to think about assets that are likely toexperience a breakdown,” he said in a telephone interview fromBeijing today. “The only thing I’m pretty comfortable withright now is U.S. Treasury securities and U.S. agency mortgage-backed securities. I think that those are overpriced so they areattractive shorts.”
In a short sale, a manager borrows a security and sells itin the hope it can be bought back later at a cheaper price.Mortgage-backed securities are issued by U.S. agencies includingFannie Mae.
Pellegrini, former manager of Paulson’s credit-opportunities funds, left in December 2008 to start a macroinvestment fund called PSQR LLC that aims to profit from changesin the global economy.
Inflation Expectations
Yields indicate government borrowing has increasedinflation expectations this year.
The difference between rates on 10-year notes and TreasuryInflation Protected Securities, or TIPS, which reflects theoutlook among traders for consumer prices, widened to 2.01percentage points from almost zero at the end of 2008. It isstill less than the five-year average of 2.18 percentage points.
The U.S. sold $7 billion of five-year TIPS yesterday at ayield of 0.769 percent, dropping from 1.278 percent at the priorauction in April. Investors bid for 3.10 times the amount ofdebt available, the most since 1997.
To contact the reporters on this story:Cordell Eddings in New York at ceddings@bloomberg.netMatthew Brown in London at mbrown42@bloomberg.net.
Last Updated: October 27, 2009 09:35 EDTSource: Bloomberg
