Treasuries Little Changed Before Record $44 Billion 2-Year Sale

Oct. 27 (Bloomberg) -- Treasuries were little changed before a $44 billion sale of two-year notes, part of a record auction of debt this week by the U.S. government.

The yield on the two-year note touched 1.0328 percent, tied for the highest level this month before the sale, the second of four auctions this week amounting to $123 billion. The Treasury Department plans to sell $41 billion of five-year notes tomorrow and $31 billion of seven-year securities in two days. Home prices in 20 U.S. cities rose in August for a third consecutive month. A separate report is forecast to show consumer confidence improved in October.

“The auctions will be heavily watched,” said Christian Cooper, an interest-rate strategist at RBC Capital Markets in New York, one of 18 primary dealers that trade with the central bank. “A large concession hasn’t occurred but as the frequency of these auctions increases, it seems like more and more the concession has already been priced in.”

The yield on the 10-year note fell one basis point, or 0.01 percentage point, to 3.54 percent at 9:31 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 rose 3/32, or 94 cents per $1,000 face amount, to 100 22/32. The yield touched 3.58 percent yesterday, the highest level since Aug. 24. The two-year note yield fell one basis point to 1.01 percent.

Home Values

The S&P/Case-Shiller home-price index climbed 1 percent from the prior month on a seasonally adjusted basis after a 1.2 percent increase in July, the group said today in New York. From a year earlier, the gauge was down 11.3 percent, less than forecast.

An index of consumer sentiment rose to 53.5, from 53.1 in September, a report from the Conference Board will show, according to a separate survey.

A collapse in the U.S. housing industry triggered the global financial crisis. The 2007 property slump froze bond markets last year and led to $1.66 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg.

President Barack Obama has increased U.S. marketable debt to a record $7.01 trillion as he borrows unprecedented amounts to battle the steepest recession since the 1930s.

Total sales of Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, Goldman Sachs Group Inc. said in a report on Oct. 20. Goldman Sachs, based in New York, is one of the 18 primary dealers that are required to bid at the government debt auctions.

Record Sales

The sizes of this week’s sales are raising speculation investors will demand higher yields before bidding.

“There’s too much supply,” said Takashi Yamamoto, chief trader in Singapore at Mitsubishi UFJ Trust & Banking, a unit of Japan’s biggest bank. “There is a little more room for yields to rise.”

The two-year notes scheduled for sale today yielded 1.082 percent in pre-auction trading, versus 1.034 percent the last time the securities were sold on Sept. 22.

Investors bid for 3.23 times the amount of debt on offer last month, the most since September 2007.

Indirect bidders, the category of investors that includes foreign central banks, purchased 45.2 percent of the notes, versus an average of 42.6 percent for the past 10 sales.

Two-year notes have returned 0.9 percent in 2009, versus a 3.4 percent loss for the whole Treasury market, according to indexes compiled by Merrill Lynch.

Pellegrini Shorts

Paolo Pellegrini, who helped make more than $3 billion at New York-based hedge-fund Paulson & Co. with wagers on the U.S. housing crash, said shorting long-term U.S. debt is the “only attractive bet.”

“I always like to think about assets that are likely to experience a breakdown,” he said in a telephone interview from Beijing today. “The only thing I’m pretty comfortable with right now is U.S. Treasury securities and U.S. agency mortgage- backed securities. I think that those are overpriced so they are attractive shorts.”

In a short sale, a manager borrows a security and sells it in the hope it can be bought back later at a cheaper price. Mortgage-backed securities are issued by U.S. agencies including Fannie Mae.

Pellegrini, former manager of Paulson’s credit- opportunities funds, left in December 2008 to start a macro investment fund called PSQR LLC that aims to profit from changes in the global economy.

Inflation Expectations

Yields indicate government borrowing has increased inflation expectations this year.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, widened to 2.01 percentage points from almost zero at the end of 2008. It is still less than the five-year average of 2.18 percentage points.

The U.S. sold $7 billion of five-year TIPS yesterday at a yield of 0.769 percent, dropping from 1.278 percent at the prior auction in April. Investors bid for 3.10 times the amount of debt available, the most since 1997.