Treasury yields rise from three-month low before 30-year auction

May 10 (Bloomberg) -- Treasuries fell, with yields climbing from three-month lows, as the government prepared to sell $16 billion of 30-year securities in the third auction of coupon- bearing debt this week.

Bonds declined more than one point amid speculation the nine-basis-point drop in yields in the previous four days made the securities expensive. Treasuries rose yesterday as concern Greece is moving closer to leaving the euro area spurred demand for safer assets and pushed the yield at an auction of U.S. 10- year notes to a record low. The Federal Reserve will sell up to $8.75 billion in notes today as part of a program known as Operation Twist.

“Yields are already low and we have a third auction,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford Connecticut. “We haven’t really garnered any more dramatic information about Europe.”

The 30-year yield rose six basis points, or 0.06 percentage point, to 3.08 percent at 9:53 a.m. New York time, according to Bloomberg Bond Trader prices. The 3.125 percent bond due in February 2042 fell 1 3/32, or $10.94 per $1,000 face amount, to 100 27/32.

The yield dropped to 2.98 percent yesterday, a level last seen on Feb. 2.

Ten-year note yields climbed eight basis points to 1.90 percent, the biggest gain since April 3. It dropped to 1.79 percent yesterday, the lowest level since Jan 31.

Swap Rates

The difference between the 10-year swap rate and the yield on similar-maturity U.S. debt narrowed for the first time in three days to 12.56 basis points. It widened yesterday to as much as 18 basis points, the most since December. Swap rates are usually higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk. Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

The 30-year bonds being sold today yielded 3.10 percent in pre-auction trading, compared with 3.23 percent the previous time the government sold the securities on April 12.

Investors bid for 2.76 times the amount of debt offered last month, versus the average of 2.67 percent for the past 10 auctions. Indirect bidders, the investor group that includes foreign central banks, purchased 30.7 percent.

“People are going to dive into duration a bit right now,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “It’s out of necessity. Situations out there are very tenuous.”

Haven Demand

Demand for a refuge from Europe’s turmoil helped the U.S. sell $24 billion of 10-year notes at 1.855 percent yesterday, a record low for an auction. Ten-year yields dropped to 1.67 percent on Sept. 23, the least ever.

The U.S. sold $32 billion of three-year notes yesterday at a yield of 0.365 percent. This week’s sales will raise $35.3 billion of new cash as maturing securities held by the public total $36.7 billion, according to the U.S. Treasury.

Treasuries have returned 0.6 percent this year, including reinvested interest, Bank of America Merrill Lynch indexes show. They returned 9.8 percent in 2011 as the European financial crisis deepened.

“European investors are looking for alternative safe havens where they can earn a little bit more and it’s coming into the Treasury market,” FTN Financial Chief Economist Christopher Low, the most accurate forecaster of Treasury note yields last year, said yesterday. “The combination of low growth and low inflation is beneficial for bonds everywhere, including U.S. Treasuries.”

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