Move Over Latvia, There's A New Kid In Town

Treasuries Tumble After Auction, Russian Threat to Cut Holdings
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By Daniel Kruger and Dakin Campbell
June 10 (Bloomberg) -- Treasuries fell, pushing 10-year yields to the highest level since October, as the government sold $19 billion of the securities and Russia said it may switch some of its reserves from U.S. debt.
The notes drew a yield of 3.99 percent, the highest since August 2008. The auction was the second of three sales this week that will raise $65 billion, part of the government’s record borrowing program. A Russian central bank official said the nation may buy International Monetary Fund bonds.
“There are an awful lot of Treasuries being auctioned and there’s going to be more and more and more and more,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.
The yield on the 10-year note rose 12 basis points, or 0.12 percentage point, to 3.98 percent at 1:29 p.m. in New York, according to BGCantor Market Data. It hit 3.99 percent, the highest since Oct. 20. The 3.125 percent security maturing in May 2019 declined 30/32, or $9.38 per $1,000 face amount, to 93 2/32.
The 30-year bond yield touched 4.77 percent, the highest in a year. The government is scheduled to sell $11 billion of the securities tomorrow.
The Standard & Poor’s 500 Index fell 1.1 percent.
Seven bond-trading firms surveyed by Bloomberg News had forecast a yield of 3.975 percent. The sale is a reopening of the record $22 billion 10-year note sale on May 6, which drew a yield of 3.19 percent.
Indirect Bids
The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold was 2.62. It was 2.47 last month and has averaged 2.40 at the past 10 scheduled sales.
Indirect bidders, the class of investors that includes foreign central banks, bought 34.2 percent of the notes, up from 31.9 percent in May. The average at the past 10 scheduled auctions is 25.8 percent.
Russia’s central bank may switch some of its reserves from Treasuries to International Monetary Fund bonds, the bank’s first deputy chairman, Alexei Ulyukayev, said in Moscow today. His comments were confirmed by a bank official who declined to be named, citing bank policy.
Finance Minister Alexei Kudrin said last month that Russia planned to buy $10 billion of IMF bonds using money from its foreign reserves.
Dollar Assets
Russia holds $138.4 billion of U.S. debt. China is the largest U.S. creditor, with $767.9 billion. The U.S. government must rely on foreign investors to sustain record borrowing.
The dollar fell as Russia’s announcement added to speculation central banks around the world may try to diversify their reserves away from the U.S. currency. The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, decreased 0.2 percent to 79.649, after sliding 1.3 percent yesterday.
“The market is reacting to this Russia thing,” said Arthur Bass, a managing director of derivatives in New York at the brokerage Newedge USA LLC. “The dollar has restarted its dive to lower levels.”
While leaders of the nations of Brazil, Russia, India and China talk about substituting the dollar, the so-called BRIC countries have increased foreign reserves at the fastest pace since September. The nations added more than $60 billion in foreign reserves in May to limit currency gains, data compiled by central banks and strategists show.
Currency Reserves
Many of those reserves are still being plowed into U.S. debt securities, according to Fed data. The central bank’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show.
The Treasury said bidding from foreigners was above average at its $35 billion three-year note auction yesterday. The sale drew bids for 2.82 times the amount of debt available, rising from 2.66 in May. Investors bought the notes after yields rose more than 50 basis points in less than a week.
“The market tends to need to build in fairly heavy concessions before every sale,” said Marc Ostwald, a strategist in London at Monument Securities Ltd. “It will be the same for today’s 10-year auction.”
Annual Loss
Longer maturities are leading losses in the Treasury market in 2009, indicating investors are demanding more yield because of the threat inflation will quicken in coming years.
Thirty-year bonds handed investors a 28 percent loss this year, versus 11 percent for 10-year notes and 0.4 percent for two-year securities, according to indexes compiled by Merrill Lynch & Co. Treasuries of all maturities have fallen 6.2 percent this year, according to Merrill indexes. The securities haven’t posted an annual decline since 1998, according to the index.
The Fed’s $3.5 billion purchase today of Treasuries maturing between August 2019 and February 2026 brings to $156.528 billion the amount purchased since the $300 billion, six-month program was announced on March 18.
Ten-year yields have risen around 144 basis points since then, complicating the Fed’s mission to lower consumer borrowing costs. Thirty-year fixed-rate mortgages jumped to 5.56 percent from as low as 4.85 percent in April, according to in North Palm Beach, Florida. Costs for homebuyers are now higher than in December.
President Barack Obama may borrow $3.25 trillion in the fiscal year ending Sept. 30, almost four times the $892 billion in 2008, according to primary dealer Goldman Sachs Group Inc. The budget deficit is projected to increase to $1.85 trillion in the year ending Sept. 30, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.
All told, the government and the central bank have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was 2.04 percentage points, a nine- month high.
To contact the reporter on this story: Dakin Campbell in New York at Last Updated: June 10, 2009 13:34 EDT

  • Russian is considering IMF bonds instead of treasuries
  • Yields on US 10 year and 30 year notes are rising quickly
  • BRIC nations publicly say they want out of the dollar
  • Obama proposes to run a $1.85 Trillion deficit (12.9% of GDP)
  • The Fed is buying its own Treasuries again.
  • Is the US trying to give Latvia a run for its money on the way to bankruptcy?
  • Doesn't this look like bond auction failure in the making?
  • Whither to inflation?