The Treasury sold $21 billion of 10- year notes at a record low yield amid speculation France may lose its top credit rating as Europe’s sovereign-debt crisis worsens bolstered the refuge appeal of U.S. government debt.
The securities drew a yield of 1.90 percent, compared with a forecast of 1.928 percent in a Bloomberg News survey of nine of the Federal Reserve’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 3.29, versus an average of 3.1 for the past 10 auctions. It was the second of three auctions totaling $66 billion this week.
“The expectation is for Europe to have a rough six months, and that adds to the reason you want to be in high-quality U.S. duration,” said Thomas Connor, president and head of trading at Pierpont Securities in Stamford, Connecticut.
The yield on the current 10-year note fell seven basis points, or 0.07 percentage point, to 1.90 percent at 1:02 p.m. in New York, according to BGCantor Market Data. Thirty-year bond yields fell six basis points to 2.96 percent.
Demand for Treasuries as a haven has pushed debt due in 10 years or longer up 28 percent in the past 12 months, the most among 144 government-bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Ten-year yields fell more than 140 basis points in 2011 as Europe’s debt crisis intensified. Ten-year notes returned 17 percent last year, outperforming the 9.8 percent gain by the broader Treasury market, according to Bank of America Merrill Lynch indexes.
Last month’s offering of 10-year notes drew a yield of 2.02 percent, near the record low 2 percent yield at the September sale.
“There’s a need for the securities,” Scott Graham, head of government-bond trading in Chicago at Bank of Montreal’s BMO Capital Markets Corp., a primary dealer, said before the auction. “There’s a rumor that France has been given a 12-hour notice for a downgrade.”
French Finance Minister Francois Baroin denied having been notified by a ratings company about a downgrade of France’s AAA credit ranking.
The U.S. is due to auction $13 billion of 30-year debt tomorrow, after selling $32 billion in three-year notes yesterday to a record bid-to-cover ratio of 3.73. This week’s auctions will raise $30.5 billion of new cash as $35.5 billion of maturing securities are held by the public, according to Treasury Department data.
Volatility in the Treasury market is near its lowest level in almost seven months. Bank of America Merrill Lynch’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, inched up to 80.2 yesterday, near the lowest point since June 13. The 2011 average was 94.14, with a high of 117.8 on Aug. 8 and a low of 71.5 on May 31.
Primary dealer holdings of government securities, including bills, coupon securities and inflation-indexed debt, increased to the most since November 2010. The 21 primary dealers held $74.7 billion of the securities as of Dec. 28. The firms held $61.6 billion of Treasury securities due in more than one year as of Dec. 28, a record amount.
Treasuries held in custody at the Fed for foreign central banks and other official investors dropped to $2.67 trillion, at the end of December from $2.73 trillion at the end of November, according to data compiled by Bloomberg News.
The Fed purchased $2.25 billion in Treasuries today. It is replacing $400 billion of shorter maturities in its holdings with longer-term debt to cap borrowing costs in a plan it announced in September. It purchased $2.3 trillion of Treasury and mortgage-related bonds from 2008 through June in two rounds of quantitative easing to support the economy.
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