U.S. Bonds Plummet in Weakest Treasury Auction Since 1983

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U.S. Bonds Plummet After Weakest Demand at Auction Since at Least 1983

By Perri Colley McKinney and Al Yoon

Thu, 10 Feb 2000, 4:40pm EST

New York, Feb. 10 (Bloomberg) -- U.S. notes and bonds plunged after the Treasury's $10 billion auction of new 30 1/4-year debt received the weakest bids in at least 17 years, completing the final part of a $32 billion government refunding.

Securities dealers, who are obligated make markets in Treasuries, demanded higher yields following three weeks of turbulent trading. The market's volatility the past 10 days is the greatest since October 1998, after Russia defaulted on its debt and Long-Term Capital Management was rescued by some of its biggest investors.

Because of the sudden price swings, ``people don't want to get involved,'' said Michael Cheah, who manages $1.5 billion for SunAmerica Asset Management.

The 30-year bond fell for a second day, dropping 1 5/8, or $16.25 per $1,000 face amount, to a price of 95 27/32. Its yield surged 11 basis points to 6.44 percent, while 10-year yields rose 14 basis points from where they were sold yesterday to 6.68 percent.

Bonds slumped after the auction produced a high yield of 6.34 percent, well above the 6.254 percent anticipated by traders. Investors bid 1.33 times the amount of bonds sold, about half the average amount bid at the past 10 auctions and the lowest for a bond auction since at least 1983, according to Stone & McCarthy Research Associates of Princeton, New Jersey.

This is ``the most poorly bid auction I've ever seen,'' said George Adell, head of research at Philadelphia-based Starboard Capital Management.

Dealers `Disrupted'

The 30-year bond fell in advance of the auction as dealers sold 30-year debt to hedge against the risk of owning some of the new securities they would be required to buy.

In just three weeks, 30-year bond yields reached a 2 1/2-year high of 6.75 percent on expectations for accelerating inflation and more interest-rate increases by the Federal Reserve. Then they tumbled to as low as 6.06 percent in intraday trading a week ago as the government's plan to buy back 30-year and other long-term debt prompted frenzied purchases. ``The turmoil disrupted dealers,'' said Louis Crandall, money market economist at Wrightson & Associates, a research firm.

About $42 billion of bills, notes and bonds traded through most of the major bond brokers by 3 p.m. New York time, 32 percent less than the average Thursday in the first quarter of 1999 and 17 percent greater than the average Thursday in the past month, according to GovPx Inc., which supplies information on Treasury prices and trading.

Optimism Foiled

Pre-auction trading suggested some investors would snap up the new bonds, given the relative shortage of 30-year bonds. Last year, the Treasury cut sales of bonds to twice a year from three times, and last month said the government will use its budget surplus to buy back longer-dated securities later this year.

The new bonds yielded 10 basis points less than the existing benchmark bond before the auction, indicating investors were ``obviously putting a premium'' on the new bonds, said Jeffrey Palma, an economist at Warburg Dillon Read Inc.

At yesterday's 10-year sale and Tuesday's five-year sale, the new notes sold at yields of 6.54 percent and 6.74 percent, respectively. The five-year note yields were the highest since 1997.

Lost Gains

The benchmark bond had risen more than 3/4 point in early trading, recouping some of yesterday's more than 1 point loss after Treasury Secretary Lawrence Summers said the government would hold down borrowing costs by using Treasuries of all maturities. Some traders initially took that to mean the Treasury wouldn't reduce the supply of 30-year debt as much as they had expected.

Traders bought some bonds back today as they became more convinced yesterday's comments from Summers didn't suggest a change in policy.

With the auctions out of the way, the direction for Treasuries could be determined by a report tomorrow that's expected to show retail sales powered ahead after the best annual performance in 15 years, analysts said. That will likely keep alive expectations for one or two more quarter-point interest rate increases by the Fed, traders said.

The Fed already raised its target for overnight bank lending in four quarter-point moves since June, to 5.75 percent. ``The Federal Reserve is still tightening. The economy is just too strong'' to buy bonds, Cheah at SunAmerica said.

)2000 Bloomberg L.P. All rights reserved.

-- Possible Impact (posim@hotmail.com), February 10, 2000

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