Citigroup launches $5.5. billion bond deal; brokerages meet on GSE debt
SAN FRANCISCO (MarketWatch) -- Treasurys on Tuesday extended a rally that's taken yields to record lows, as investors anticipated the Federal Reserve would buy up more bonds to push down interest rates.
The benchmark 10-year Treasury bond came back from an early morning loss to gain 0.8% while yields , which move in the opposite direction than prices, slid 6 basis points to 2.678%.
The two-year note's yield fell 2 basis point at 0.8891%, pushing the level further under the fed funds target rate of 1%. Yields on the two-year Treasury note often anticipate levels of fed funds.
Bonds had given up some of the prior session's gains at the open, sending yields higher, as stocks rebounded and bond investors took profits. The Dow Jones Industrial Average closed up 3.3% and the S&P 500 rose nearly 4%. Read Market Snapshot.
After Monday's bond rally, "we saw some profit-taking this morning in Treasurys," said Kevin Giddis, head of fixed income at Morgan Keegan in Memphis, Tenn.
But those trends reversed around midday as traders again returned to expectations the Fed would become a buyer of Treasurys and debt issued by government-sponsored agencies such as Fannie Mae and Freddie Mac .
"Anytime you have the government buying Treasuries or agencies, people try to get in front of it," Giddis said.
Representatives from the New York Fed met with primary dealers Tuesday to discuss technical details of a trading platform to buy and sell agency debt, said NY Fed spokesman Andrew Williams.
The Fed is expected to start buying GSE debt on Friday, part of an $800 billion plan to buy mortgage-backed securities, asset-backed securities and other debt spurned by investors during the credit crunch. See full story.
The 30-year bond yield fell 5 basis points Tuesday to 3.1662%.
Ongoing rally
On Monday, bonds rallied and yields on the 10-year Treasury fell to a record low after a sharp sell-off in the stock market -- fueled by glum economic news -- pushed investors into safe-haven bonds.
Bonds were further bid up Monday by comments from Fed Chairman Ben Bernanke that the U.S. central bank might buy long-term Treasurys once it had exhausted its use of interest-rate cuts.
The U.S. government has increasingly acted as a buyer of last resort in the bond markets, as it seeks to get capital flowing and reduce consumer and commercial borrowing costs.
On Tuesday, Citigroup, Inc. said it launched a three-part, $5.5 billion offering of notes backed by the FDIC.
And General Electric Capital Tuesday filed a prospectus with the Securities and Exchange Commission to issue notes backed by the FDIC. Terms and size weren't disclosed, although GE spokesman Russell Wilkerson said the company had filed for a "benchmark" deal, or one over $500 million.
An offering from Citigroup and General Electric Co.'s troubled financing arm join similar government-backed debt deals issued by Goldman Sachs , Morgan Stanley and Bank of America Corp. .
For Citigroup, anticipated rates on its new securities are at a steep discount to comparable yields of its existing bonds. For instance, the three-year floating rate is expected to carry a spread of one-month Libor plus 80 basis points, or about 2.7%. In contrast, a Citigroup note due April 2013 is currently yielding 7.7%.
"They are getting a very good deal," said Spencer Lee, manager of the fixed-income trading desk at SCM Advisors LLC. "Not only is it attractive, it gives them access" to the bond markets, he said.
Bond markets closed their doors to all but the safest issuers after recession worries and bad loan losses have mounted in recent months.
