Money for nothing: Government sells short-term bills to yield zero
NEW YORK (MarketWatch) -- Treasurys headed higher Tuesday, helped by a strong bill auction that showed investors simply wanted assurance that they'd get their principal back.
The market reached the highs of the day after the Treasury Department sold $32 billion in 4-week bills at a yield of 0%.
Ten-year note yields ) fell 7 basis points, or 0.07%, to 2.65%; 2-year note yields fell 10 basis points to 0.83%.
Investors bid $126 billion at the auction, more than four times the amount available. Yields on 1-month debt have plunged from about 1.80% in June.
"I have never seen this before," said Michael Franzese, head of government bond trading at Standard Chartered. "It's all about capital preservation for the turn of the year, not capital appreciation."
Three-month bill rates also have dropped to near zero, at 0.01%.
"Risk aversion is still really high," said Robert Tipp, chief investment strategist at Prudential Fixed Income Management, which oversees more than $200 billion of bonds. "Money funds are being forced to stay [in the shortest maturities] because of a lack of ability to forecast volatility."
Treasurys had some support earlier as a report showed pending-home sales continued to fall, signaling no bottom for the pressures facing the economy.
An index of sales contracts on previously owned U.S. homes fell 0.7% in October from the prior month, the National Association of Realtors said.
The index, considered a good indicator of existing home sales, declined much less than September's revised decline of 4.3%.
More auctions
The gains come even as traders prepare to bid on a more-than-anticipated $44 billion in notes being auctioned this week.
The Treasury Department will sell $28 billion in 3-year notes Wednesday and $16 billion in 10-year notes on Thursday, more than previously expected by analysts.
Yields on longer-maturity notes may remain relatively low compared with shorter-term securities, as the Federal Reserve and government focus on programs to dampen mortgage rates in the hopes of reviving the home-sales market, analysts at Barclays Capital said.
The Fed started buying debt sold by mortgage agencies Fannie Mae and Freddie Mac last week, and is expected to also purchase mortgage-backed securities soon. Falling rates on those securities tends to encourage investors to hedge their holdings, sometimes by buying Treasurys.
For the Treasury market, that also will have the effect of keeping the gap between 2-year notes and 10-year notes smaller than it has been recently, according to Barclays, one of the 17 primary security dealers that trades with the Fed.
"The flatness in the curve can be sustained by both mortgage-related activity and the Fed and Treasury's intent to keep long-dated rates low," Barclays strategists wrote in a research note.
That spread, charted on the yield curve, has shrunk to 1.82 percentage points, from as high as 2.6 points on Nov. 13.
