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Treasuries Fall as 30-Year Bond Auction Draws Yield of 4.288%

By Dakin Campbell

May 7 (Bloomberg) -- Treasuries extended losses as the government’s auction of $14 billion of 30-year bonds drew a yield that was higher than dealers anticipated.

The bonds yielded 4.288 percent, compared with the average forecast in a Bloomberg News survey of seven bond-trading firms for a yield of 4.192 percent. Demand was below average, judging by total bids. Treasuries declined earlier as speculation increased that U.S. banks are strong enough to weather the recession and a report showed jobless claims unexpectedly fell.

The benchmark 30-year bond yield climbed 17 basis points, or 0.17 percentage point, to 4.26 percent at 1:05 p.m. in New York, according to BGCantor Market data. The 3.5 percent security due in February 2039 tumbled 2 21/32, or $26.56 per $1,000 face amount, to 87 7/32. The 10-year note yield increased 11 basis points to 3.30 percent.

The auction’s so-called bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.14, compared with an average of 2.24 at the past 10 sales of the maturity. Thirty-year bonds yielded 3.64 percent at the last sale, on March 12.

Today’s auction began the Treasury’s monthly sales of the so-called long bond, up from quarterly offerings at the end of last year. That means the government will boost sales of the security from $35 billion in 2008 to $120 billion this year, according to Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 16 primary dealers that trade with the central bank and are required to participate in Treasury auctions.

‘More Attractive’

The yield on the benchmark 30-year bond earlier reached 4.1844 percent today, the most since Nov. 18, while the 10-year yield touched 3.2670 percent, the highest since Nov. 25.

“Treasuries are getting more attractive here,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. If 10-year note yields rose to 3.3750 percent, it would be “a good entry point for a short-term trade,” he said.

Initial claims for jobless benefits decreased by 34,000 to 601,000 in the week ended May 2, the fewest since late January, the Labor Department said in Washington. The median forecast in a Bloomberg News survey was for 635,000 claims. A separate report tomorrow may show employers cut 600,000 jobs in April, fewer than the 663,000 they eliminated in March.

Stress Tests

Federal regulators unveil today what Treasury Secretary Timothy Geithner said will be a “reassuring” picture of the U.S. banking system.

“There is very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward,” Geithner said yesterday in an interview on PBS television’s Charlie Rose program.

Federal Reserve-led stress tests on the 19 biggest lenders show Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. together require about $54 billion in additional capital, said people familiar with the conclusions. At the same time, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of New York Mellon Corp. have enough capital, the people said.

“A lot of people view that whatever capital raises have to occur will likely be done through conversion of preferred shares,” said Martin Mitchell, head of government bond trading at the Baltimore unit of Stifel Nicolaus & Co. “I don’t think it’s as bad as some people expected.”

Obama Budget

Fed Chairman Ben S. Bernanke said in a speech in Chicago the financial crisis showed “serious deficiencies on the part of some financial institutions” in risk-taking, capital adequacy and liquidity planning.

Details of President Barack Obama’s record $3.55 trillion budget plan, released today, showed he is seeking $81 billion more in spending on domestic initiatives while calling on Congress to trim $17 billion worth of programs, including raising more tax revenue from oil and gas industries.

The Fed completed two buyback operations this week, bringing the total of U.S. debt acquired to $92.215 billion through 16 purchases. The central bank said in March it will buy as much as $300 billion in Treasuries over six months.

The Bank of England said today it will increase bond purchases to 125 billion pounds ($188 billion). The European Central Bank lowered its benchmark rate to 1 percent and said it will buy 60 billion euros ($80 billion) in covered bonds.

‘Sharp Adjustment’

In pursuing these strategies, central bank purchases of government and corporate debt will likely stoke inflation and “cause a sharp adjustment in bond prices,” the People’s Bank of China said in a quarterly policy report released yesterday.

The story out of China “is partially responsible for the selling pressure in Treasuries,” wrote Ian Lyngen, an interest- rate strategist in Greenwich, Connecticut, at RBS Securities Inc., in a note to clients today. The firm is a primary dealer.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices over the next decade, widened to 1.56 percentage points from near zero at the end of last year. It’s below the five-year average of 2.24 percentage points.

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net

Last Updated: May 7, 2009 13:07 EDT