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Treasuries Drop as Dealers Digest $67 Billion in Notes, Bonds

By Susanne Walker – Bloomberg.com

Feb. 13 (Bloomberg) — Treasuries fell, pushing yields on 10- and 30-year securities up the most in two weeks, as bond dealers sought to find buyers for the record $67 billion in notes and bonds the government sold this week.

The losses, led by 30-year bonds, pared U.S. securities’ first weekly gain in almost a month. A private report showed consumer sentiment plunged in February. Treasury Secretary Timothy Geithner urged leading industrial nations to take “exceptional” steps to resolve the deepening global financial crisis even as he faced challenges about his own rescue plan.

“What’s really driving the market today is the digestion of the Treasury supply,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “It’s more than offsetting the news on the economic-data front with the drop in consumer confidence.”

The yield on the benchmark 10-year note climbed 11 basis points, or 0.11 percentage point, the most since Feb. 3, to 2.90 percent at 2:56 p.m. in New York, according to BGCantor Market Data. The price of the 2.75 percent security maturing in February 2019 fell 31/32, or $9.69 per $1,000 face amount, to 98 23/32. Thirty-year bond yields surged 16 basis points, also the most since Feb. 3, to 3.69 percent.

The 10-year yield dropped 10 basis points this week. The yield, which tumbled to a record low of 2.04 percent on Dec. 18, averaged 4.55 percent this decade. The 30-year yield was down two basis points for the week.

Two-year note yields rose four basis points to 0.96 percent. The difference, or spread, between them and yields on 10-year notes widened to 192 basis points from 145 basis points at the start of the year.

Primary Dealers

The Treasury auctioned $32 billion of three-, $21 billion of 10- and $14 billion of 30-year debt this week. Thirty-year bonds yielded 3.54 percent at yesterday’s sale, the lowest on record, yet higher than the 3.514 percent yield traders anticipated in a Bloomberg News survey before the auction.

Primary dealers’ shares of two of the U.S. securities that were sold slipped amid the steady increase in supply, Bloomberg data showed. They purchased 54.1 percent of the three-year notes, compared with an average of 81.6 percent at auctions of the security over the past three years, and 49.6 percent of the 30- year bonds, compared with an average of 68.2 percent at auctions since February 2006.

The 74.9 percent share primary dealers took of the $21 billion of 10-year notes was just above the average of 74.2 percent at sales over the past three years.

Net Positive Holdings

Bond dealers had a net positive holding in Treasury notes and bonds for the first time in 10 years in the seven days ending Feb. 4, Fed data show. Their holdings of Treasuries have increased as they pare positions in assets with greater risk profiles.

Dealers now hold $114 billion of corporate bonds, compared with $251.4 billion a year ago. They hold $29.3 billion of Treasuries, the most since 2001. Excluding bills, dealers hold $3.2 billion in government debt, the most since 1998, the data show. Dealers usually place a bet against Treasuries to hedge the interest-rate risk of their holdings in corporate bonds or other fixed-income products with higher risk.

Record amounts of U.S. notes will be sold later this month, according to a forecast by Wrightson ICAP, a Jersey City, New Jersey-based research firm that specializes in U.S. government finance.

Supply Overhang’

The Treasury will auction $41 billion in two-year notes on Feb. 24, $31 billion in five-year notes on Feb. 25, and $25 billion in its reintroduction of seven-year notes on Feb. 26, according to Wrightson. The department is set to announce the amount of the sales on Feb. 19.

“The market continues to adjust because of the supply we got,” said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 16 primary dealers that trade with the Federal Reserve and are required to bid in Treasury auctions. “There is still supply overhang from the $67 billion, and a recognition that there will be more supply in two weeks, and two weeks later, we’ll get more again.”

The U.S. will probably borrow $2.5 trillion during the fiscal year ending Sept. 30 as the budget deficit swells amid programs to thaw credit markets and revive the economy, according to primary dealer Goldman Sachs Group Inc. That’s almost triple the $892 billion in notes and bonds the government sold in the prior 12 months.

The so-called real yield on 10-year notes, or the yield after inflation is taken into account, was 2.79 percent, compared with 2.11 percent at the end of last year. Consumer prices rose 0.1 percent last year, after increasing 4.1 percent in 2007.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

Last Updated: February 13, 2009 15:01 EST

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