Saturday, 1 August 2009

US Treasury two-year note yields rose the most in eight weeks

The following report from Bloomberg illustrates the stress now being endured by the ongoing refinancing of the US deficit:

Aug. 1 (Bloomberg) -- Treasury two-year note yields rose the most in eight weeks after mixed results at this week’s four note auctions renewed concern a deluge of borrowing of will overwhelm investor demand.

Government securities have posted losses for four consecutive months, the longest losing streak since 1996. The Treasury sold $115 billion of notes over the five days ended July 31, including a record $42 billion of two-year securities and $39 billion of debt maturing in five years, also a record, both of which drew lower-than-forecast interest from investors.

“Supply was the focus this week,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 18 primary dealers that trade with the Federal Reserve. “Clearly some of these auctions are getting up to sizes where they are getting more difficult for the market.”

The benchmark two-year note yield rose 12 basis points on the week, or 0.12 percentage point, to 1.11 percent, according to BGCantor Market Data. The yield touched 1.22 July 29, the highest since June 25. The 1 percent security maturing in July 2011 rose 3/32, or 94 cents per $1,000 face amount, to 99 24/32 after closing at 99 21/32 after its sale on July 28.

Government securities of all maturities handed investors a 0.03 percent gain this week through July 30, according to Merrill Lynch & Co.’s U.S. Treasury Master index. For the month, the debt lost 0.3 percent. The last time the securities slid for four straight months was from February to May of 1996, amid signs of growth in the U.S. economy. Treasuries have fallen 4.7 percent in 2009.

Out the Curve

Indirect bidders, an investor class that includes foreign central banks, purchased 33 percent of the two-year notes offered July 28, compared with 68.7 percent in the previous auction in June, which was the most in at least six years. That class bought 36.7 percent of the five-year notes sold July 29, down from 62.8 percent at the June sale, which was the highest since December 2004.

The record $28 billion offering of seven-year notes drew stronger-than-forecast demand after yields on the existing security rose to the highest level in a month prior to the auction. Indirect bidders bought 62.5 percent of the notes, compared to 67.2 percent at the June auction and an average of 40 percent at the past five auctions.

“Central bank interest is moving further out the curve,” said James Combias, New York-based head of Treasury trading at primary dealer Mizuho Securities USA Inc. “Everyone has been defensive in the front end of the curve for a long time. Maybe they want to get ahead and the opportunity to pick up yield and duration.”

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