By Susanne Walker and Dakin Campbell
June 11 (Bloomberg) -- Treasuries surged as an $11 billion sale of 30-year bonds drew the highest yield in almost two years, luring investors concerned that record government spending and debt sales will lead to inflation.
Yields fell as indirect bidders, a class of investors that includes foreign central banks, bought the biggest percentage of so-called long bonds at an auction since the Treasury reintroduced the 30-year security in 2006. Ten-year noteyields fell the most in almost two weeks after earlier touching 4 percent for the first time since October.
“Indirect demand was a bit of a surprise, but it’s excellent for the market,” saidRay Remy, New York-based head of fixed income at Daiwa Securities America Inc., one of 16 primary dealers required to bid at Treasury auctions. “It means investors thought 4.72 percent was a great rate to own bonds and they made a commitment to the market.”
The yield on the 10-year note fell nine basis points, or 0.09 percentage point, to 3.87 percent, after climbing as high as 4.0038 percent, at 2:39 p.m. in New York, according to BGCantor Market Data. The yield last touched 4 percent on Oct. 16. The 3.125 percent security maturing in May 2019 rose 21/32, or $6.56 per $1,000 face amount, to 93 30/32.
The 30-year bond yield fell six basis points to 4.70 percent. It earlier touched 4.8391 percent, the highest since October 2007.
Thirty-Year Auction
The bonds sold today drew a yield of 4.72 percent, the highest since August 2007, and above the 4.80 percent average forecast by eight bond-trading firms surveyed by Bloomberg News. The sale is a reopening of the $14 billion 30-year bond auction on May 7, which drew a yield of 4.288 percent.
“At 4.7 percent, 30-year Treasuries are compelling,” said Nils Overdahl, a bond-fund manager at New Century in Bethesda, Maryland, which oversees $500 million. “You are really picking up a lot.”
Indirect bidders bought 49 percent of the bonds, up from 33 percent in May. That class of investors bought 65.4 percent at the February 2006 sale, when the Treasury brought back the bond after a five-year hiatus.
The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold, was 2.68. It was 2.14 last month and has averaged 2.21 at the past 10 scheduled sales.
Big Leagues
The demand from indirect bidders at today’s sale may help ease concern that international investors will slow purchases.
Russia and Brazil announced plans yesterday to buy $20 billion of bonds from the International Monetary Fund and diversify foreign-currency reserves. China will purchase $50 billion and India may announce similar funding, Brazil’s Finance Minister Guido Mantega said.
Russia holds $138.4 billion of U.S. debt. China is the largest U.S. creditor, with $767.9 billion. The U.S. government must rely on foreign investors to sustain record borrowing.
“They’re saying they are part of the big leagues,” Alberto Ramos, an economist in New York at primary Goldman Sachs Group Inc.. “They’re not buying IMF bonds to diversify reserves. They want to be seen as having a large voice” in global markets, he said.
While leaders of the so-called BRIC countries talk about substituting the dollar, they have increased foreign reserves at the fastest pace since September. They added more than $60 billion in foreign reserves in May to limit currency gains, data compiled by central banks and strategists show.
Dollar Reserves
Many of those reserves are still being plowed into U.S. debt securities, according to data from the Fed. Its holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.7 percent, in May, the third most on record, data compiled by Bloomberg show.
Former Federal Reserve Chairman Paul Volcker said there are “no practical alternatives” to the dollar as an international currency. Volcker, head of Obama’s Economic Recovery Advisory Board, spoke today in Beijing.
The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell 0.9 percent to 79.45.
Treasuries tumbled 6.5 percent so far this year, the worst performance since Merrill Lynch & Co. began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish President Barack Obama for quadrupling the budget shortfall to $1.85 trillion and raising the risk of inflation.
Borrowing Costs
“Clearly the supply issue is having a far-reaching impact,” said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets. “Virtually all can be attributed to the supply issue. The economic data has not been that bond bearish.”
The rise in yields is undermining Fed Chairman Ben S. Bernanke’s efforts to cap consumer borrowing costs and pull the economy out of the worst recession in five decades.
The average 30-year mortgage rate jumped to 5.59 percent from 5.29 percent a week earlier, Freddie Mac, the McLean, Virginia-based mortgage buyer, said today in a statement. The 15-year rate averaged 5.06 percent.
“The economy doesn’t need higher mortgage rates because that will depress the level of home sales, cut off refinancing, and keep consumer spending sluggish,” said Patrick Newport, an economist with Lexington, Massachusetts-based IHS Global Insight.
The U.S. may borrow $3.25 trillion in the fiscal year ending Sept. 30, almost four times the $892 billion in 2008, according to Goldman Sachs.
