Treasuries Snap Gain Before Three Debt Sales This Week

By Wes Goodman - May 7, 2012 5:59 PM PT

Treasuries snapped a two-day gain on speculation yields that approached record lows will erode demand when the government auctions $72 billion of coupon-bearing securities this week, starting with a three-year auction today.

Benchmark 10-year notes, scheduled for sale tomorrow, yielded 1.62 percentage points more than the upper end of the Federal Reserve’s target range for overnight bank loans, a three-month low. The average over the past five years is 2.08 percentage points. Yields slid yesterday as investors sought the safest assets after elections in France and Greece raised concern European governments will drop deficit-cutting plans that they implemented to combat the region’s debt crisis.

“The market is very expensive,” said Kei Katayama, who buys Treasuries in Tokyo at Daiwa SB Investments Ltd., which oversees the equivalent of $62 billion and is part of Japan’s second-largest securities company. “If the European situation clears up, then Treasury prices should correct.”

Ten-year notes yielded 1.87 percent of 9:46 a.m. in Tokyo, according to Bloomberg Bond Trader data. The 2 percent security due in February 2022 changed hands at 101 1/8. The rate was as low as 1.82 percent yesterday, versus the record of 1.67 percent.

The three-year auction will be for $32 billion, and the 10- year sale will total $24 billion. The Treasury Department will conclude this week’s offerings with a $16 billion 30-year bond on May 10.

U.S. debt rose yesterday after Francois Hollande, who defeated incumbent Nicolas Sarkozy for the French presidency, pledged to push for less austerity.

The Fed plans to buy as much as $5 billion of Treasuries today, targeting securities due from May 2018 to February 2020, according to the Fed Bank of New York’s website.

The purchases are part of the U.S. central bank’s effort to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to hold down borrowing costs.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.