Treasury Results for 2009

Treasury Debt Sales Top $2.1 Trillion for Year .ArticleComments (6)more in Markets

By MIN ZENG
Wednesday's successful $32 billion seven-year note auction wraps up a record year of debt sales by the U.S. government.

The Treasury sold more than $2.1 trillion in notes and bonds this year, more than in the previous two years combined, to fund a widening budget shortfall and finance programs to rescue the banking system and support the economy.

Yet, despite the supply onslaught, buyers—from foreign central banks to U.S. households and domestic commercial banks—flocked to the sales. As a result, the government's borrowing costs fell to historic lows in 2009. That provided further support to the economy because Treasury rates are the benchmark for many types of corporate and consumer borrowing.

Strong demand for U.S. debt came when the U.S. economy was in dire straits, with unemployment rising as high as 10.2% and the government's deficit ballooning to $1.4 trillion in the fiscal year to September 2009. Beside the prospect of a recovering economy, concerns that buyers could stay away from this week's record-tying $118 billion in note sales led to a sharp spike up in Treasury yields in December. Two-, five- and 10-year yields rose to their highest levels since mid-August this week.

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Associated Press DEBT PROTECTION: The Treasury's debt auctions like the large ones this week are run by the markets desk at the Federal Reserve Bank of New York, shown above in April.
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The average yield in the two-year note auctions dropped to 1.002% in 2009, down sharply from 2.078% in 2008 and 4.307% in 2007, according to Ian Lyngen, senior government bond strategist at CRT Capital Group LLC. The average auctioned yield for the 10-year note fell to 3.262% from 3.681% last year and 4.632% in 2007, he said.

Wednesday afternoon, the benchmark 10-year note was up 6/32 point, or $1.875 per $1,000 face value, at 96 21/32. Its yield fell to 3.786% from 3.809% Tuesday, as yields move inversely to prices. The 30-year bond was up 22/32 point to yield 4.605%.

"It is a victory for the U.S. government," said Amitabh Arora, head of Citigroup Global Markets' U.S. rate-strategy group. Had the auctions not gone so well, he said, interest rates would be much higher, raising borrowing costs for homeowners and companies.

But, for investors, Treasurys weren't such a good investment as an improving economy boosted the returns on riskier assets such as stocks and corporate bonds. After a 14% return in 2008, Treasurys have handed investors a loss of 3.43% through Tuesday in 2009, putting them on pace for the worst annual return since at least 1973, according to data from Barclays. In contrast, U.S. high-yield corporate bonds have delivered a return of 57.9% this year.

Nonetheless, demand at Treasury auctions remained resilient throughout the year as the Federal Reserve held rates near zero amid the still fragile economic recovery and subdued inflation pressures. The Fed's $300 billion Treasury-buying program to support the economy also helped, while many foreign central banks bought Treasurys as a way to temper gains in their own currencies, which would have undermined their exports.


Timothy Geithner
.Foreign investors, including central banks and private investors, are forecast to buy a net $333 billion in Treasury notes and bonds this year, up from $315.4 billion for 2008 and the average of $282.9 billion from 2003 to 2007, according to a research report earlier this month by Mr. Arora and colleague Vikram Rai. The strategists expect net buying from foreign investors to be $325 billion in 2010.

China, the biggest owner of Treasurys outside the U.S., bought a net $71.5 billion through the end of October, according to the latest data from the Treasury Department. Japan, the second-largest foreign holder of Treasurys, was the biggest buyer this year, with a net purchase of $120.5 billion over the same period.

Next year, the Treasury is expected to sell about $2.45 trillion in notes and bonds, setting another record. But yields may need to rise to entice buyers, particularly as the economic recovery gathers pace. Treasury Secretary Timothy Geithner said recently the economy is growing again and that job losses are expected to come down rapidly. That makes it attractive for investors to hold riskier assets in seeking better returns.

The U.S. government also will face more competition for investors' dollars as the broader credit markets recover from the financial crisis and the sale of corporate debt and mortgage-backed securities picks up.

The Fed's decision to end its $1.25 trillion purchase program of mortgage-backed securities in March next year, as well as expectations that the central bank could start to raise interest rates again to keep inflation risks at bay, will also push up Treasury yields.

"We expect 2010 to be a tougher year for the Treasury to sell record amounts" of securities, said Adam Brown, managing director of Treasurys trading at Barclays Capital Inc. in New York.

Icahn Goes to Market
Icahn Enterprises LP is offering $2 billion in new senior bonds, its first such sale since 2005.

The notes will fund the buyback of $967 million of 7.125% senior notes due 2013 and $353 million of 8.125% senior notes due 2012 at a total consideration of just over 102 cents on the dollar.

"It's nice for the bondholders, taking them out early and giving them a little extra premium above par value," said Barbara Cappaert, an analyst at high yield bond research firm KDP Advisors. "It also takes care of refinancing risks in 2012 and 2013."

The investment management firm, controlled by activist investor Carl Icahn, didn't announce the maturity of the new bonds, which is being handled through private placement, so there was no disclosure in public filings.

Chief Financial Officer Dominick Ragone on Wednesday declined to comment further on the offering.

.The company also said in a statement it is in negotiations to acquire majority equity stakes in American Railcar Industries Inc. and food packaging firm Viskase Companies Inc., in each case from affiliates of activist investor Carl Icahn.

"The company will now have a good war chest to go out looking at other investments," Ms. Cappaert said, noting that Icahn Enterprises is using equity to fund the two company acquisitions and has historically been careful to maintain a large cash balance. "It will be interesting to see what sectors they see value in and decide to go after."

Many companies over the past year have bought back bonds due in the next few years and sold new, longer-term bonds to benefit from low rates now.

"It makes sense, taking advantage of the cheap capital sloshing around the system," said portfolio manager William Larkin at Cabot Money Management.

Icahn Enterprises' 7.125% notes due 2013 gained 1.35 points to 100.5 on Wednesday in thin late-December trade, according to online bond trading platform MarketAxess, which didn't list any trades for the 8.125% senior notes due 2012.

Moody's Investors Service rates Icahn Enterprises as Ba3, and Standard & Poor's puts it as BBB-, the last rung before junk status.

Mr. Icahn has taken positions in companies ranging from Take 2 Interactive Software Inc. to CIT.

Write to Min Zeng at min.zeng@dowjones.com