U.S. NUDGES CEILING AFTER BOND SALE / THE FINANCIAL TIMES CAPITAL MARKETS ( VERY HIGHLY RECOMMENDED READING )

US nudges ceiling after bond sale

By Michael Mackenzie in New York

Published: May 12 2011 20:46

The US Treasury is within a whisker of breaching its debt ceiling next week after concluding its latest round of bond sales on Thursday.

When this week’s $72bn in new debt settle next Monday, that will push outstanding Treasury issuance to the limit of its $14,294bn debt ceiling.

The Treasury has said it will implement ‘extra-ordinary measures’ to prevent a potential default in August.

The last leg of this week’s debt sales, $16bn in 30-year bonds, attracted tepid demand from investors.

Demand from big institutional investors and foreign central banks slipped to a share of 33 per cent, down from the average of 41 per cent seen for the past six auctions. The bid-to-cover ratio of 2.43 times was lower than the recent average of 2.62.

That left bond dealers with 58 per cent of the auctioned debt or $9bn of bonds. Treasury prices weakened and yields, which move inversely to prices and have fallen steadily in recent weeks, rose after the sale, led by the 30-year sector.

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Dan Greenhaus, chief economic strategist at Miller Tabak, said the 30-year sale was “the worst auction of the week and among the worst received auctions we’ve seen over the last two years”. The bond was sold at 4.38 per cent, the lowest yield for a bond auction since November.

“The fact remains that the overwhelming majority of Treasury auctions have gone quite well, while the yield of 4.38 per cent is extraordinarily beneficial for a sovereign looking to borrow for a 30-year time frame,” said Mr Greenhaus.

The bond auction contrasted with the sale of $32bn in three-year notes on Tuesday and $24bn in 10-year paper on Wednesday. Both sales attracted solid demand and arrived at the lowest yields seen since late last year.

Over the past month, benchmark yields have fallen and demand from foreign investors has picked up, fuelled, in part, by lacklustre economic data and volatile swings in the prices of commodities and risk assets.

Fears that the delay over raising the Federal debt ceiling could scare away some buyers of Treasuries have yet to be realised.

Laurence Lau, head of the Hong Kong office of China Investment Corp, the Chinese sovereign wealth fund, told reporters on Thursday: “US Treasuries are safe investments, and the US government will pay back its debts, there is little concern about that.”

However, the impasse in Washington over the debt ceiling, which, in turn, has reduced the sale of Treasury bills, and recent regulatory changes, continue to anchor short-term US rates near zero. Treasury bills are at record lows, with three-month bills yielding just 2 basis points.

And this week, the general collateral rate – which is used for borrowing and lending Treasuries in the repurchase market – traded at minus 0.02 per cent.

“An absence of supply is keeping the repo and bill markets extremely well bid,” said Joe Abate, strategist at Barclays Capital.

“With no intervention from the Fed or Treasury alongside an absence of supply through the end of June points to low front-end rates for some time.”

Copyright The Financial Times Limited 2011.