BLBG: Treasuries Little Changed as Auctions Loom, Spain’s Outlook Cut
By Susanne Walker and Paul Dobson
Dec. 9 (Bloomberg) -- Treasuries were little changed as the U.S. prepared to sell $34 billion of notes and bonds today and tomorrow and Standard & Poor’s cut the credit outlook for Spain to “negative.”
The difference between 2- and 30-year securities reached the widest amount in 17 years before today’s auction of $21 billion of 10-year notes and tomorrow’s $13 billion sale of 30- year debt. Treasuries rose yesterday as the record-tying $40 billion sale of three-year notes drew the lowest yield since January after a reduction in Greece’s credit rating spurred demand for the relative safety of U.S. debt.
“The ratings agencies seem to be taking notice of the high ratio of GDP to outstanding debt in some countries and it’s something the market is taking note of,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.
Benchmark 10-year note yields fell one basis point, or 0.01 percentage point, to 3.38 percent at 10:04 a.m. in New York, according to BGCantor Market Data, after earlier rising as much as four basis points. The 3.375 percent security maturing in November 2019 rose 2/32, or 63 cents per $1,000 face amount, to 99 31/32.
S&P revised Spain’s outlook to negative from stable. The ratings agency, which downgraded Spain from AAA to AA+ in January, said the country will experience a “more pronounced and persistent deterioration in its public finances and a more prolonged period of economic weakness versus its peers,” than it had expected in January.
‘At Their Posts’
The spread between yields on 2-year and 30-year Treasuries touched 366 basis points today. The last time the spread was so large was 1992, when the Federal Reserve cut interest rates to bolster growth after a recession.
“The market has been waiting with trepidation for today and tomorrow’s auctions,” Chris Ahrens, head of interest-rate strategy in Stamford, Connecticut at UBS Securities LLC, wrote in a note to clients. The firm is one of the 18 primary dealers that trade with the Federal Reserve. “The conventional wisdom has it that underwriting all this long duration is going to be difficult in a quiet December market. The only problem with the reasoning is that it hasn’t particularly held true. Yesterday’s price action suggested that portfolio managers are at their posts again this week.”
‘Near Term Threat’
The Treasury sold $40 billion of three-year notes yesterday at a yield of 1.223 percent, compared with the average forecast of 1.229 percent in a Bloomberg News survey of six of the Fed’s primary dealers. Investors bought 2.98 times the available securities, compared with an average of 2.75 for the past 10 sales.
The last auction of 10-year notes, a record $25 billion offering on Nov. 10, drew a yield of 3.47 percent, below the average forecast of 3.475 percent in a Bloomberg News survey.
The yield on the two-year note rose one basis point to 0.73 percent. It dropped 11 basis points in the first two days of the week after Fed Chairman Ben S. Bernanke said on Dec. 7 that the U.S. economy faces “significant headwinds” and that the target rate for overnight lending between banks would stay low for an “extended period.”
The central bank’s efforts to boost economic growth are leading to speculation inflation will accelerate in the years ahead, eroding the value of bonds’ fixed payments.
Greece’s Debt
The spread between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, was at 2.13 percentage points, up from almost zero in December 2008.
The next worldwide crisis will probably strike in 2012, driven by inflation as the low cost of borrowing spurs increases in asset prices, said Andy Xie, a former Morgan Stanley chief Asian economist, in a report yesterday.
That contrasts with the view of Pacific Investment Management Co., which runs the world’s biggest bond fund. Deflation is a “bigger near-term threat,” Pimco said in a report on its Web site.
Yields on two-year Greek government notes added 20 basis points today to 2.94 percent following a jump of 66 basis points yesterday.
Fitch Ratings cut Greece’s credit rating yesterday one step to BBB+, the third-lowest investment grade, on concern the nation may struggle to meet its debt commitments as public finances deteriorate.
“After the recent news flow and flight to quality, we expect a solid set of results and are especially mindful of the degree of direct bidder participation in the U.S.,” Charles Diebel, head of European interest-rate strategy at Nomura International Plc in London, said in an investor note today.
To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net. To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net;
