Treasurys Rise After 30-Year Sale

'Long Bond' Sees Strong Demand In Its First Auction Since 2001

February 9, 2006 4:25 p.m.

Investors threw a "welcome back" party for the 30-year Treasury bond, which had its first auction in five years Thursday and was met with strong demand, particularly from foreign buyers.

The Treasury Department sold $14 billion in 30-year bonds at a high yield of 4.53%, with demand for the so-called long bond coming in at twice the supply offered. The auction showed a "clean story" of "very strong retail demand," said David Ader, fixed income strategist of RBS Greenwich Capital.

The Treasury received bids totaling $28.72 billion, for a bid-to-cover ratio -- the number of bids relative to the amount of bonds sold -- of 2.05.

The strong auction helped lift other long-dated bond prices, but shorter-dated maturities ended close to their starting mark. By 4 p.m. Eastern, the 10-year Treasury, auctioned only yesterday, yielded 4.543%. The 30-year Treasury gained 16/32 point, or $5 for each $1,000 invested, to 110 23/32, yielding 4.647%. The new long bond to begin trading Friday yielded 4.5% -- about 0.14 percentage point below where the February 2001 bond traded.

The five-year yielded 4.54% and the three-year and two-year each were flat, with yields of 4.61% and 4.65%, respectively. Those two shorter-maturity issues had initially risen after the announcement of the long bond sale.

"The auction was extremely well bid, and foreign participation was just blockbuster," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson in Seattle. She attributed it to "a lot of demand and very little (long-duration) paper with yield" available to investors.

Gary Gensler, former Treasury under secretary for domestic finance, and PIMCO's Steve Rodosky comment on the return of the 30-year bond.Demand was high even though the top-line yield came in lower than the 4.58% analysts had expected. A total of 65% of the bids accepted were awarded to indirect bidders, which include foreign central banks, far outpacing the 40% and 22% participation from indirect bidders in the 10-year and three-year auctions earlier this week, respectively.

Prior to the sale, dealers were still concerned about whether investors would come out en masse. The three-year note auction Tuesday was poor, analysts said, and while Wednesday's 10-year sale attracted buyers, the market immediately sold the note soon after the auction. "People thought … it was going to be a good one, but there was some concern because, let's face it, the issue was rich compared to the surrounding maturities," Ms. Hurley said.

That so many indirect bidders turned out despite the pre-auction run-up in the price attests to the need for long-dated securities. The Treasury retired the long bond in 2001, but revived it to help governments and corporations fund longer-term obligations like pensions.

The gains in the long end of the market came just after the market got another warning from a Federal Reserve official that more rate increases could well lie ahead of the central bank. Chicago Fed President Michael Moskow said that while he expects inflation to remain contained, price pressures were near "the upper end" of his comfort zone.