Treasuries rise on Greece bailout news
Treasuries rose for the first time in four days amid speculation Europe’s rescue package for Greece won’t resolve the region’s debt crisis and the U.S. sold $35 billion of five-year notes.
The notes drew a yield of 0.900 percent, compared with a forecast of 0.901 percent in a Bloomberg News survey of seven of the Federal Reserve’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.89, compared with an average of 2.9 for the previous 10 sales.
“It was ham-on-rye,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The auction was nothing really special. The Greece thing is discounted a bit because people believe it may turn into another debacle. There’s no optimism and that’s why Treasuries are being bid.”
The yield on the current five-year note fell three basis points, or 0.03 percentage point, to 0.88 percent, at 1:04 p.m. in New York, according to Bloomberg Bond Trader Prices. The yield on the benchmark 10-year note fell four basis points to 2.02 percent.
Debt Returns
Five-year notes have lost 0.1 percent so far this year, compared with a 0.7 percent loss for the broader Treasury market, according to Bank of America Merrill Lynch indexes, as of yesterday.
Indirect bidders, an investor class that includes foreign central banks, purchased 41.8 percent of the notes, compared with an average of 43.8 percent for the past 10 sales.
Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 12.9 percent of the notes, compared with an average of 11.7 percent at the last 10 auctions.
Seven-year notes may become less coveted in the short-term market for borrowing and lending securities after the government auctions more of the debt. Traders have been willing to pay to borrow the securities in exchange for loaning cash for the most actively traded seven-year note, which is the 1.25 percent security that matures in January 2019.
Repo Market
Typically, lenders of cash receive interest on those loans, represented by a positive repurchase agreement, or repo, rate. Many times traders short, or sell securities they’ve borrowed in the repo market, ahead a Treasury sale to profit if prices of the securities fall after the auction.
Today’s note offering is the second of three note auctions this week totaling $99 billion. The Treasury sold $35 billion in two-year debt yesterday and will sell $29 billion of seven-year bonds tomorrow.
This week’s note auctions and last week’s sale of $9 billion of 30-year Treasury Inflation Protected Securities will raise $47.8 billion of new cash as maturing securities held by the public total $60.2 billion.
Investing in U.S. government bonds is the least attractive investment in a world of “financial repression,” said Leon Cooperman, chief executive officer of Omega Advisors Inc.
“With a 2 percent government bond, if we’re talking about marginal tax rates, you’re keeping 60 percent of your 2 percent -- you’re keeping 1.2. percent,” Cooperman said in an interview with Erik Schatzker on Bloomberg Television’s “InsideTrack.” “The rate of inflation is somewhere in the range of 2 to 3 percent, so your capital is being confiscated. It makes no sense.”
Economic Data
Sales of previously owned U.S. houses rose in January to the highest level since May 2010, adding to signs the housing market is regaining its footing. Purchases climbed 4.3 percent to a 4.57 million annual rate, less than forecast, from a revised 4.38 million pace in December that was slower than previously estimated, a report from National Association of Realtors showed today in Washington.
The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs and spur the economy under a program it plans to conclude in June.
The central bank bought $1.84 billion securities due from February 2036 to August 2041 today under the program, according to the New York Fed’s website.
Europe is still struggling to avoid the threat of default as investors warn Greece will soon risk violating the terms of the second bailout it was granted yesterday. Even with investors and central bankers helping relieve the debt burden, economists from Citigroup Inc. to Commerzbank AG concluded Greece may again fail to deliver amid a fifth year of recession.
Greece’s downgrade by Fitch Ratings to C from CCC is the first in a series of ratings cuts that the nation can expect after it negotiated the biggest sovereign debt restructuring in history.
Fitch said it will cut the nation again to “Restricted Default” once a bond exchange is completed. Standard & Poor’s said in July it expected to downgrade Greece to “Selective Default” after the restructuring agreement, while Moody’s Investors Service has said it will cut the nation to its lowest rating.