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Foreign central banks buy up treasuries auction Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=10000087&sid=aofQyH_L4DDo&refer=top_world_newshttp://www.bloomberg.com/apps/news?pid=10000087&sid=aofQyH_L4DDo&refer=top_world_news
Treasuries Rise; Demand for 10-Year Notes Exceeds Expectations
Nov. 10 (Bloomberg) -- Treasuries surged after demand from overseas investors, who hold about half of all U.S. government debt, rose to a record in an auction of 10-year notes.
Foreign central banks and so-called indirect bidders bought 55.6 percent of the $13 billion of 10-year notes sold, the most since the Treasury began releasing bidder-participation data in May 2003. The sale was the last of three this week totaling $44 billion. The auction yield was the highest in 17 months.
``The auction was fantastic,'' said Michael Franzese, head of U.S. Treasury trading at Zions First National Bank in Jersey City, New Jersey. Today's demand contrasted with lackluster overseas interest at the five-year auction yesterday and the three-year auction Nov. 8. Ten-year notes fell the most in two weeks yesterday.
The yield on the benchmark 10-year note declined 8 basis points, or 0.08 percentage point, to 4.57 percent at 2:25 p.m. in New York, according to bond broker Cantor Fitzgerald LP. Yields move inversely to prices. Yesterday the yield surged 9 basis points, its biggest increase since Oct. 25.
``A move below 4.55 percent would get the bears quivering and the bulls running,'' Franzese said.
The price of the 4 1/4 percent note due in August 2015 rose more than 1/2, or $5 per $1,000 face amount, to 97 15/32. The longest-maturity Treasury, the 5 3/8 percent bond due in February 2031, rose more than $10 per $1,000 as its yield dropped 7 basis points to 4.76 percent.
The notes sold today, maturing in November 2015, drew a yield of 4.578 percent, lower than the 4.592 percent pre-auction average estimate of seven bond-trading firms surveyed by Bloomberg News, another sign of strong demand. The yield was the highest for a 10-year note auction since June 2004.
Central Banks Buy
Today's record 55.6 percent participation rate by indirect bidders including central banks is higher than yesterday's 21.1 percent at the $13 billion five-year note sale, and 29.9 percent at the $18 billion sale of three-year notes.
Overseas investors owned $2.06 trillion, or 50 percent, of the $4.1 trillion of tradeable Treasuries outstanding as of August, up from less than 40 percent three years ago.
In the last series of quarterly auctions in August, foreign demand for 10-year notes also was stronger than for three- and five-year notes, and Treasuries rallied.
The Bond Market Association, a trade group, recommended that U.S. bond markets be closed tomorrow in observance of the Veterans Day holiday.
`Decent Value' in Yields
Yields remain near their highest levels of the year on concern the Federal Reserve will add to its 12 interest-rate increases since June 2004. The 10-year note's yield touched 4.68 percent on Nov. 4, within a basis point of its 4.69 percent high for the year in March. Five-year yields touched a three-year high, and three-year note yields last week were the highest since 2003.
``Yields represent decent value,'' Gary Pollack, head of fixed-income trading at Deutsche Bank AG's investment-management unit in New York, which has about $12 billion in assets, said before the auction. ``We've been buying 10-year notes this week.''
Treasuries rallied even as a private measure of consumer confidence rose more than expected in November. The University of Michigan's consumer sentiment index, which fell to a 13-year low in October, rose to 79.9 from 74.2. The median forecast of economists polled by Bloomberg was for a smaller increase in the index to 76.5.
Spending, Inflation
Consumer confidence slumped last month as fuel prices surged to records after Hurricane Katrina struck the U.S. Gulf Coast in August. Spending by consumers accounts for about two- thirds of the U.S. economy. Crude oil, gasoline and heating oil futures now are trading at pre-storm levels. While down from their peak natural gas futures have yet to decline to their August level.
Fuel prices remain elevated by historical standards. Crude oil, gasoline and heating oil have more than doubled in the past four years, and natural gas has more than tripled.
Fed officials are concerned about the potential for inflation to spread beyond energy prices. The central bank lifted its target for the overnight lending rate between banks at each of its past 12 meetings, most recently to 4 percent on Nov. 1, and interest-rate futures show traders expect increases at the next two meetings.
``The cumulative rise in energy and other costs have the potential to add to inflation pressures,'' policy makers' statement announcing the Nov. 1 rate increase said.
Yield Trajectory
``Five percent is still what I'm happy with'' for a 10-year yield forecast, said Jim O'Neill, global head of economic research at Goldman Sachs Group Inc. in London. ``The message from the Fed is going to remain the same and the Fed's going to keep going, so bond yields are still going to be gravitating in an upward direction.''
William Poole, president of the Fed's St. Louis bank, yesterday said the risk of inflation is still ``skewed toward the high side.'' He said the central bank's preferred measure of core inflation, which excludes food and energy prices, may exceed the 2.25 percent he said economists forecast for next year.
Except for the New York Fed's president, Fed bank presidents rotate as voters on the central bank's monetary policy committee. Poole doesn't vote this year.
The Commerce Department's price index for personal consumption expenditures, the Fed's preferred gauge, rose 2 percent in September from a year earlier, the top of the 1.75 percent to 2 percent range the central bank forecast in July.
Interest-rate futures traders are fully pricing in an increase in the federal funds target rate to 4.25 percent when policy makers meet next on Dec. 13. The chance of an increase to 4.5 percent at the following meeting on Jan. 31 is about 90 percent, up from 36 percent at the end of September.
The central bank will continue to increase the federal funds rate target to 4.75 percent in the second quarter, according to the median forecast of 63 economists surveyed by Bloomberg from Oct. 31 to Nov. 8.
Last Updated: November 10, 2005 14:45 EST
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