By Daniel Kruger April 28 (Bloomberg) -- Treasuries fell on speculation yesterday’s surge drove bond prices high enough to curtail demand when the U.S. sells $42 billion of five-year notes today. Bonds jumped the most this year yesterday after Greece had its debt rating cut to junk. The rally made Treasuries more expensive for investors who plan to bid today before the Federal Reserve announces its interest-rate decision. The government has a seven-year auction tomorrow, the last of four sales this week totaling a record $129 billion. “It’s a combination of consolidation after yesterday’s big run up, and we do have five-year supply,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “I suspect the flight-to-quality underpinnings from Greece will contain any backup in rates as the broader uncertainty has yet to be resolved.” The yield on the benchmark 10-year note rose six basis points to 3.74 percent at 10:55 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security due February 2020 fell 15/32, or $4.69 per $1,000 face amount, to 99 2/32. Yields on 10-year slid 12 basis points yesterday, the biggest drop since Dec. 17, and touched 3.67 percent, the lowest since March 23. The five-year notes being sold today yielded 2.52 percent in pre-auction trading, compared with 2.605 percent at the previous auction March 24. Investors bid for 2.55 times the amount on offer last month, equal to the average bid-to-cover ratio of the past 10 sales. Direct Bidders Indirect bidders, a class of investors that includes foreign central banks, bought 39.7 percent of the notes at the March sale, the lowest level since July 2009. Indirect bids averaged 49.3 percent in the prior 10 offerings. Direct bidders, non-primary dealers that place their bids directly with the Treasury, purchased 10.8 percent of the securities at the last sale, compared with a 10-auction average of 6.8 percent. The U.S. sold $44 billion of two-year notes yesterday at a yield of 1.024 percent, compared with the average forecast of 1.022 percent in a Bloomberg survey of eight of the Fed’s 18 primary dealers, companies required to bid at the government’s debt sales. Investors bid for 3.03 times the amount offered, compared with 3 times last month. Financial futures traded at the CME Group Inc. exchange show a majority of traders see no change in central bank interest-rate policy through at least September. Fed Speculation Some traders and investors are speculating the Fed will remove language asserting it will hold rates low for an “extended period” or that it will discuss selling some of the $1.25 trillion in mortgage securities it bought in the 16 months through last March, though that is “a minority view,” Lyngen at CRT Capital Group said. “Most people are looking for more of the same.” Treasury prices surged yesterday after Standard & Poor’s cut Greece’s credit ratings to high-yield, high-risk status, and borrowing costs rose in Italy, Portugal and Ireland. S&P forecast investors would be paid no more than half their initial outlay in the event of any restructuring of Greek debt. It lowered the long-term sovereign ratings on Greece to BB+ from BBB+, and reduced Portugal’s long-term local and foreign-currency sovereign-issuer credit ratings to A- from A+. The MSCI World Index slid 0.8 percent. The euro fell below $1.32 yesterday for the first time since April 2009. Riskier Debt Credit-default swaps linked to Greek government bonds surged to record high levels, signaling investors perceive it to be the world’s riskiest debt ahead of Venezuela and Argentina. Swaps on Greece imply there’s a 54 percent probability of default over the next five years after surging 116.5 basis points to 940.5, according to CMA DataVision prices. That compares with a 48 percent likelihood of Venezuela failing to meet its commitments and 44 percent for Argentina. Credit-default swaps are contracts for protecting bonds against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of credit quality. The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails meet its debt agreements. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, increased to 19 basis points, from 14 basis points at the start of April. The spread reached 4.64 percentage points in October 2008 as credit markets froze around the world following the collapse of Lehman Brothers Holdings Inc. the month before. Breakeven Rate The spread between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for inflation known as the breakeven rate, was at 2.36 percentage points after yesterday touching an 11-week high of 2.39 percentage points. The Federal Open Market Committee, composed of Fed governors and regional-bank presidents, will issue a statement at about 2:15 p.m. in Washington at the end of their two-day meeting. The panel is likely to repeat its pledge to leave the benchmark federal funds rate close to zero for an “extended period,” said analysts including David Resler, chief economist at Nomura Securities International Inc. in New York. Fed fund futures showed a 65 percent chance the Fed will raise its target rate by at least a quarter point by year-end, down from 76 percent odds a month ago. To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

Source