Bond rally steals Treasury’s thunder at 2-year sale

By Burton Frierson

NEW YORK (BestGrowthStock) – The U.S. government sold $44 billion of two-year debt on Tuesday in an auction that drew soft demand as the fiscal crisis in troubled euro zone countries sparked a rally in Treasuries prices that drove yields lower.

The U.S. government sold $44 billion of two-year debt on Tuesday in an auction that drew soft demand as the fiscal crisis in troubled euro zone countries launched a rally in debt prices and drove yields lower.

The auction was the second and biggest of four bond sales in this week’s record offering of $129 billion worth of coupon-paying securities and suffered from expensive pricing because of the run-up in Treasury prices.

The Treasuries rally came in a session in which Standard & Poor’s cut Greece’s sovereign credit ratings to “junk” status and also downgraded Portugal, leading investors to opt for the traditional safe harbor of U.S. government bonds.

Expensive market levels led investors to demand a premium to take down the bonds. This was illustrated by yields at the auction, which were higher than expectations in the when-issued market, also known as a tail.

“The two-year came weaker than expected due to the run-up before the auction on a safe-haven bid on the back of the Greece downgrade,” said Tom di Galoma, head of fixed income rates trading at Guggenheim Partners in New York.

Overall demand at Tuesday’s auction was still solid based on the bid-to-cover ratio of 3.03 times the amount on offer. That was above the long-run average of 2.36.

Foreign central banks and large institutional investors appeared to show weak demand, based on the indirect bidder category, which took about 31 percent of the sale.

That was below its average of about 45 percent since June 2009, which has become a benchmark for comparisons because of changes in calculations since then.

However, the direct bidding category accounted for 21 percent of the sale, well above its average of about 11 percent since June. This category has been growing for much of the market in recent months.

Financial markets have been watching bond auctions closely, given a burgeoning U.S. budget deficit brought on by a costly financial sector bailout and efforts to stimulate the economy.

While analysts say the jump in debt could come back to haunt the government, the Treasury last week signaled its bond issuance may have peaked, suggesting the worst may be over.

Traders were not inclined to view Tuesday’s sale as a sign of weak demand overall for U.S. debt securities, given the exceptional circumstances.

“I think with the run-up that the market has seen this morning, that probably took some of the bidders away,” said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.

“It tailed, it had 31 percent go to indirect bidders, which was actually a little bit on the low side. The bid-to-cover ratio was 3.03 and that was very, very good. So I would call it a mixed auction.”

Stock Market Research

(Additional reporting by Ellis Mnyandu; Editing by Padraic Cassidy)

Bond rally steals Treasury’s thunder at 2-year sale