Treasuries Fall as U.S. Says Borrowing May Reach $2 Trillion

Dec. 10 (Bloomberg) — Treasuries fell as the government said it may need to introduce new methods to sell a record amount of debt, fueling concern the government will flood the market with securities to pay for financial rescue programs.

Yields climbed after Treasury Assistant Secretary Karthik Ramanathan, in a speech in New York, cited private analysts’ estimates of borrowing needs that may reach as much as $2 trillion in the financial year that ends in September 2009. An auction of $28 billion in three-year notes drew less demand than the last sale.

“There is plenty of uncertainty and risk that they need to borrow more,” said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of 17 primary dealers that trade with the Federal Reserve.

The yield on the benchmark 10-year note rose five basis points, or 0.05 percentage point, to 2.70 percent at 5:27 p.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 fell 13/32, or $4.06 per $1,000 face amount, to 109 4/32. The yield on the two-year note rose one basis point to 0.85 percent.

U.S. stocks climbed, with the Standard & Poor’s 500 Index gaining 1.2 percent.

The three-year note auction drew a yield of 1.245 percent, the lowest on record. It was more than two basis points above the 1.223 percent in pre-sale trading. The sale was expected to draw a yield of 1.231 percent, according to the average forecast of four bond-trading firms surveyed by Bloomberg News.

‘Cheaper than Expectations’

The so-called bid-to-cover ratio, which compares the number of bids with the amount of securities sold, was 2.15. That showed there was less demand than at the last auction of three- year notes, a $25 billion sale Nov. 11, when the ratio was 3.07.

“It came cheaper than expectations, and it was a bit of a surprise,” said Ray Remy, head of fixed income in New York at Daiwa Securities America Inc., another primary dealer. “It’s December, and the market has been low volume and very thin all day long.”

The Treasury Department will sell $16 billion of 10-year securities tomorrow.

The three-month bill rate was 0.01 percent after falling to minus 0.01 percent yesterday. The Treasury sold $27 billion of the securities on Dec. 8 at a high discount rate of 0.005 percent, the lowest since it started auctioning them in 1929.

The Treasury market is overvalued, said Bill Gross, manager of the world’s biggest bond fund.

‘Bubble Characteristics’

“Treasuries have some bubble characteristics, certainly the Treasury bill does,” Pacific Investment Management Co.’s Gross said in a Bloomberg TV interview from Newport Beach, California. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return.”

While U.S. borrowing costs are dropping to record lows, companies such as El Paso Corp. and Cox Communications Inc. are still paying the highest relative rates ever to sell debt not backed by the U.S. government. Yields relative to benchmark rates on investment-grade corporate bonds surged to a record 6.55 percentage points yesterday, according to Merrill Lynch & Co. index data.

Investors looking for alternatives to low-yielding Treasuries are buying agency notes and about $65 billion in financial-company bonds guaranteed by the Federal Deposit Insurance Corp. On Dec. 5, the yield on two-year debt issued by the government-sponsored enterprises Fannie Mae and Freddie Mac, and the Federal Home Loan banks, fell below the three-month London interbank offered rate for the first time since Oct. 14, according to strategists at primary dealer UBS Securities LLC.

‘Higher-Yielding Pastures’

“The agency market has finally seen the direct benefit of crashing Treasury yields as investors seek greener and higher- yielding pastures,” UBS strategists led by William O’Donnell wrote in a note to clients today. This “should better lubricate the transmission mechanism of GSE funding into mortgage rates — a key goal for policy makers.”

Demand for government debt also slumped as banks showed less reluctance to lend. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed nine basis points to 209 basis points, the least in two weeks. It was as wide as 464 basis points Oct. 10.

Treasuries have returned 11.9 percent in 2008, their best year since 2000, according to Merrill Lynch & Co. indexes. During that time, the three-month bill rate declined from 3.24 percent, while the yield on the benchmark 10-year note fell from 4.02 percent as the meltdown of the mortgage market pushed the U.S. into recession.

Curve to Steepen

The difference in yield between two- and 10-year notes, the so-called yield curve, touched 1.83 percentage points today, the widest in almost two weeks.

The U.S. budget deficit swelled to $164.4 billion last month, the Treasury Department reported, the second straight month it widened. It was $98.2 billion last November. The department said in October it will more than triple its planned debt sales this quarter to help finance this year’s shortfall, expected to exceed $1 trillion, according to Edward McKelvey, an economist at Goldman Sachs Group Inc.

“Longer term, we think everything the Federal Reserve is doing and that the government is doing ends up being very inflationary,” said Ira Jersey, an interest-rate strategist at primary dealer Credit Suisse Group AG, in an Bloomberg Television interview. “It makes sense for the yield curve to steepen a bit and for longer-term yields to rise from these historic lows.”

To contact the reporters on this story: Dakin Campbell in New York at; Cordell Eddings in New York at

Last Updated: December 10, 2008 17:34 EST
By Dakin Campbell and Cordell Eddings

Source: Bloomberg

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