30-Year Treasuries Fall Most Since '04 as Demand Fades at Sale

By Sandra Hernandez


Feb. 7 (Bloomberg) -- Treasuries tumbled after the government's $9 billion auction of 30-year bonds at the lowest yields ever chased away investors.

The longest-maturity U.S. debt fell the most since 2004 as bondholders concluded that yields were too low given the Federal Reserve's determination to cut interest rates and keep the economy out of a recession. Before the government's sale, investors expected a 4.41 percent yield, based on pre-auction trading. The bonds were sold at 4.449 percent.

``This is a massive boycott,'' said George Goncalves, chief Treasury and agency debt strategist in New York at Morgan Stanley, one of the 20 primary government securities dealers that are required to bid at Treasury auctions. ``We got a message that enough's enough.''

The yield on the new 30-year bond auctioned today rose to 4.51 percent as of 5 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield on the previous benchmark bond due in May 2037 rose 16 basis points, or 0.16 percentage point, to 4.52 percent, the biggest one-day leap on a long bond since April 2004. The 2037 bond fell about 2 3/4, or $27.50 per $1,000 face amount, to 107 3/4.

The yield on the 10-year note auctioned yesterday rose 16 basis points to 3.76 percent, the largest increase in yield since 2004. Yesterday's auction yield was the lowest since regular quarterly sales of the note began in 1978. Ten-year yields touched a 4 1/2-year low of 3.285 percent on Jan. 23, the day after the Fed's emergency 0.75 percentage point rate cut.

Lowest on Record

The auction yield on the new long bond was the lowest since regular sales of the security began in 1977, according to Steve Meyerhardt, an official in the Bureau of the Public Debt in Washington.

Indirect bidders, the class of investors that includes foreign central banks, bought 10.7 percent of the securities, the lowest on a new 30-year bond since the Treasury resumed sales of the maturity in February 2006 after an almost five-year hiatus. The 20 primary dealers bought 89 percent of the sale, the most since the bond was reintroduced.

``Most of it was a dealer auction which meant that customers themselves didn't put their money where there mouths were,'' said James Collins, an interest-rate strategist in Chicago at Citigroup Global Markets Inc., a primary dealer. ``The market knows dealers are going to have to sell the issue at a steep discount.''

Speculation that the economy would fall into a recession helped push the 30-year bond yield to 4.1 percent on Jan. 23, the lowest since regular sales began in 1977. Treasuries of all maturities have returned 2.9 percent in 2008, the best start to a year since 1988, according to Merrill Lynch & Co. indexes.

ISM Report

The gains compare with a 9 percent loss in the Standard & Poor's 500 Index to start the year. Demand for the safety of government debt increased as banks and securities firms have reported $146 billion of losses and writedowns on mortgage- linked investments since the start of 2007.

Treasuries briefly pared losses after the Institute for Supply Management denied speculation the group would revise its latest report, which showed service industries contracted the most since 2001, Ian Lyngen, a strategist at RBS Greenwich Capital in Greenwich, Connecticut, said in a note today.

The ISM's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9, the lowest since October 2001, the last time the U.S. was in a recession, from 54.4 the prior month, the Tempe, Arizona-based group said Feb. 5.

No Error

There was no error in the original report and no revision is planned, ISM spokeswoman Andrea Wass said in an e-mail to Bloomberg News.

Traders pushed 10-year note yields to 1.7 percentage points above two-year rates. The difference is the biggest since September 2004, signaling reduced demand for longer-maturity debt, which is most sensitive to expectations that inflation will accelerate as rate cuts spur growth.

The two-year note's yield rose 12 basis points to 2.06 percent.

``To the extent that long-term inflation expectations have risen a fair degree, as the Fed has been aggressive in easing, it would be negative for the 30-year,'' said Kurush Mistry, an interest-rate strategist in New York at Lehman Brothers Holdings Inc., a primary dealer.

U.S. economic growth will accelerate at a 2.5 percent annual rate in the fourth quarter, double the pace of this quarter, according to the median forecast of analysts surveyed by Bloomberg News. U.S. consumer prices rose 4.1 percent in 2007, the most since 1990, the Labor Department said last month.

Traders see a 90 percent likelihood that Fed policy makers will reduce their target for overnight loans between banks by a half-point to 2.50 percent at or before their next scheduled meeting on March 18, futures on the Chicago Board of Trade show. The rest of the bets are for a 75 basis point cut.

``The auction went as poorly as one could imagine,'' said Andrew Brenner, co-head of structured products in New York at MF Global Ltd., the world's largest broker of exchange-traded futures and options contracts.