Nov. 29 -- Treasuries rose and three-month bill yields fell below 3 percent for the first time since August as concern over banks' willingness to lend drove investors to the relative safety of U.S. government debt.
The interest rate that banks charge each other for borrowing in dollars for one month rose the most in more than a decade as banks sought to cover their commitments through the start of 2008. Yields on notes fell as futures traders increased bets that the Federal Reserve will cut borrowing costs a half- percentage point next month to prevent a recession.
``People are looking for funding over the next few weeks and through year-end,'' said Michael Franzese, head of government bond trading in New York at Standard Chartered. ``The best place to put cash is in T-bills.''
The three-month bill's yield fell 6 basis points, or 0.06 percentage point, to 2.97 percent at 1:19 p.m. in New York. The yield on five-year notes dropped 12 basis points to 3.38 percent. Yields on 10-year notes decreased 14 basis points to 3.92 percent.
The Treasury's $13 billion auction of five-year notes drew the weakest demand since July.
In a sign of banks' reluctance to lend to each other, the difference between three-month bill yields and the London interbank offered rate, or Libor, was the widest in three months. The ``TED'' spread increased 18 basis points to 2.23 percentage points, the biggest since Aug. 20, when money-market funds dumped assets linked to a collapsing U.S. mortgage market in favor of the shortest-maturity government debt. The spread has more than doubled this month.
Libor Rises
Investors bought government debt as one-month Libor for dollars jumped 40 basis points to 5.23 percent, the British Bankers' Association said. Today is the first day a cash loan of one month will cover a borrower's needs through the end-of-year holiday period.
The rate rose to 72.5 basis points above the Fed's 4.5 percent target for overnight lending between banks, the highest since Sept. 18, when the central bank cut its benchmark a half- percentage point.
The spread was higher in 1999 over possible computer glitches associated with the changeover to the new millennium, and in 1998 on the collapse of Long-Term Capital Management LP, according to T.J. Marta, a fixed-income strategist in New York at RBC Capital Markets.
``Not exactly good company to be keeping,'' he said. ``The markets are just so uncertain at this point. There's more than just a year-end liquidity problem.''
December Outlook
Fed funds futures on the Chicago Board of Trade show traders see a 26 percent chance that the central bank will lower its benchmark borrowing cost to 4 percent at its meeting Dec. 11, compared with 6 percent yesterday. That pushed down the odds that the rate will be reduced to 4.25 percent to 74 percent, from 94 percent yesterday.
Price swings in U.S. government debt reached the highest since September 2003 this week. Merrill Lynch & Co.'s MOVE index, a measure of expectations for Treasury volatility, rose to 133.4 on Nov. 27. The index, based on prices of over-the- counter options on Treasuries maturing in two to 30 years, has risen from a record low of 51.2 on May 15.
Treasuries are set for their best monthly performance since September 2003, returning 2.74 percent, according to indexes compiled by Merrill Lynch. U.S. government debt has returned 8.61 percent this year, on pace for the best year since 2002.
Treasuries extended their gains after the Commerce Department reported that fewer new homes were sold in October than economists forecast even as prices dropped by the most in almost four decades.
Initial Jobless Claims
The number of Americans filing first-time claims for unemployment benefits rose last week to the most since February, the Labor Department reported. The number of people staying on benefit rolls was the highest in almost two years.
``If we begin to see a faltering in that key stalwart of the economy, that's when the concerns will start to snowball,'' said Kevin Flanagan, a fixed-income strategist in Purchase, New York, for Morgan Stanley's Global Wealth Management Group.
Treasuries may also be buoyed because of purchases related to month-end index rebalancing.
On the last business day of each month, new bonds sold during the month are added to bond market indexes, prompting some investors to buy on that day.
The government sold $51 billion of notes and bonds in five auctions this month, including $33 billion this week.
Estimated Duration
Lehman Brothers Inc., which says its U.S. investment-grade bond indexes are used as benchmarks by managers of $2.5 trillion in assets, estimated the duration of its U.S. Treasury Index will increase by 0.21 year when the index is rebalanced tomorrow. The duration, a gauge of price sensitivity to changes in yield, was 5.02 years as of yesterday.
The Treasury sold five-year notes at a yield of 3.415 percent, lower than the average forecast of bond traders surveyed by Bloomberg. Investors bid for 2.26 times the amount of debt being sold. For the past 10 sales, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, averaged 2.48.
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