By Cordell Eddings and Susanne Walker
Dec. 10 (Bloomberg) -- Treasuries fell, with the gap in yields between 2- and 30-year securities reaching the widest margin since at least 1980, after a $13 billion offering of 30- year bonds drew lower-than-forecast demand.
The so-called yield curve touched 373 basis points, the most in at least 29 years, as the bonds drew a yield of 4.52 percent, compared with an average forecast of 4.483 percent in a Bloomberg News survey of five of the Federal Reserve’s 18 primary dealers. The so-called yield curve has widened from 191 basis points at the end of 2008, with the Fed anchoring its target rate at a record-low range of zero to 0.25 percent and the Treasury extending the average maturity of U.S. debt.
“This was a mediocre auction where the yield needed to be tweaked a little on the high side to get it done,” said William Larkin, a fixed-income portfolio manager in Salem, Massachusetts at Cabot Money Management, which manages $500 million. “It’s an indication of what’s to come in 2010. We expect a gradual uptick to higher yields.”
The yield on the current 30-year bond rose eight basis points to 4.49 percent at 4:11 p.m. in New York, according to BGCantor Market Data. Two-year note yields increased one basis point to 0.76 percent.
Treasury officials on Nov. 4 announced a long-term target of six to seven years for the average maturity of Treasury debt and said the department wants to cut back on its issuance of bills and two- and three-year notes. The shift to longer- maturity debt has raised concern that investors will demand higher yields to offset the risk of inflation as government spending drives the deficit to a record $1.4 trillion.
‘Piling on Out’
“The curve reflects the Fed taking short-term rates as low as it can go and the Treasury piling on out the curve,” said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York. Jefferies is one of 18 primary dealers required to bid at Treasury auctions. “While there is a strong overseas underwriting bid for 5s, 7s and 10s, the bond overwhelmingly is a domestic issue. The slope of the curve reflects the concession necessary to attract sufficient buyers to take the issue down.”
The spread between 2- and 30-year has averaged 132 basis points over the last five years. Historically, a so-called steeper yield curve reflects diminishing demand from investors anticipating faster economic growth and inflation.
Treasury two-year note yields fell 11 basis points over the first two trading days of this week as Fed chairman Ben S. Bernanke repeated that the central bank expected an “extended period” of low rates and Fitch Ratings reduced Greece’s credit rating. The yield touched 0.69 percent on Dec. 8, a level last seen on Dec. 2, two days before it surged the most since August after a report showed the U.S. economy lost fewer jobs than forecast in November.
Unable to Absorb
“Easy monetary policy coupled with loose fiscal policy and sovereign credit concerns easily explain the steep curve,” said Brian Varga, head of U.S. Treasury bond trading in New York at Standard Chartered Plc.
The bid-to-cover ratio at today’s auction, which gauges demand by comparing total bids with the amount of securities offered, was 2.45, compared with an average of 2.38 at the last 10 auctions.
Indirect bidders, an investor class that includes foreign central banks, bought 40.2 percent of the notes at today’s auction. They purchased 44 percent at the November sale. The average for the past 10 auctions is 40.4 percent.
“As we are seeing, if foreign investors don’t step into the bidding process, then the Street is not able to absorb the debt, so concessions make it now beneficial to start participating,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities in New York.
$7.17 Trillion
U.S. government debt lost investors about 2 percent this year, according to Bank of America Corp.’s Merrill Lynch Treasury Master Index, as President Barack Obama borrowed record amounts to fund spending programs. U.S. marketable debt rose to a record $7.17 trillion in November.
U.S. government securities declined yesterday after an investor class that includes foreign central banks bought the least amount of 10-year notes since June at the government’s auction.
The $21 billion offering drew a yield of 3.448 percent, compared with an average forecast of 3.421 percent in a Bloomberg survey. The bid-to-cover ratio, which gauges demand, was 2.62, less than an average of 2.63 at the past 10 auctions.
Indirect bidders, which include foreign central banks, purchased 34.9 percent of the 10-year debt on offer, compared with an average of 45.6 percent since the Treasury made changes in June on how bids are classified.
The previous day’s sale of three-year notes drew a yield of 1.223 percent, compared with a forecast for 1.229 percent.
