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Treasury 5-, 7-Year Notes Head for Fourth Monthly Gains on Refuge Appeal
U.S. five- and seven-year notes traded near the highest levels in a week, both headed for a fourth consecutive monthly gain, as investors sought safety in medium-term Treasury debt.
The seven-year note rose even after today’s auction of $29 billion of the securities, the last of three note sales this week that totaled $104 billion, drew lower demand than forecast. Thirty- and 10-year debt headed for their first monthly losses since March. A government report tomorrow is forecast to show U.S. economic growth slowed in the second quarter.
“People want to be in the five- and seven-year sectors,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “They are reaching for yield and there is not enough yield in the two-year sector. People are not extending to the 30-year because they are nervous being caught out the curve. They are concerned about fiscal policy.”
The yield on the current seven-year note fell 3 basis points to 2.36 percent at 5:15 p.m. in New York, according to BGCantor Market Data. It touched 2.33 percent, the lowest since July 22, and headed for a monthly drop of 5 basis points. Five- year yields fell 3 basis points to 1.66 percent. They reached 1.65 percent, also the lowest since July 22, and were poised for an 11 basis-point decrease in July. A basis point is 0.01 percentage point.
The 30-year bond yield rose 1 basis points to 4.08 percent and touched 4.14 percent, the highest since June 22. It headed for a 19 basis-point increase for July. The 10-year yield traded at 2.99 percent, poised for a rise of 6 basis points in July.
President Barack Obama has increased the U.S. marketable debt to a record $8.1 trillion as he tries to sustain the nation’s economic expansion.
‘Belly of the Curve’
“The rally in the bond market is being led with the belly of the curve,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “The new two-year is the five-year in terms of safety and flight to quality.”
Seven-year notes briefly pared gains today after the auction of the securities attracted a yield of 2.394 percent, higher than the 2.375 percent in pre-auction trading. The condition, called a tail, means the government had to pay a higher rate to sell the notes.
“People got long because they thought the auction was going to go well,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., which as a primary dealer is required to bid at Treasury auctions. “Everyone was surprised by the weak results of the auction, so they gave it up because they didn’t have the same sentiment.” A long position is a bet a security will gain.
Smallest Since September
Today’s auction was the smallest of seven-year debt since September. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.78, compared with 3.01 at the last sale, on June 24, and an average of 2.8 for the past 10 offerings.
Indirect bidders, an investor class that includes foreign central banks, purchased 42.3 percent of the notes, compared with an average of 52.3 percent for the past 10 sales. Direct bidders, non-primary dealer investors that place bids directly with the Treasury, bought 9 percent, compared with an average of 9.7 percent at the past 10 auctions.
A government auction of $37 billion in five-year notes yesterday drew a yield of 1.796 percent, compared with an average forecast of 1.82 percent in a Bloomberg survey of seven primary dealers.
Record Low Yield
The Treasury sold $38 billion in two-year debt on July 27 at a record low yield of 0.665 percent.
Government bonds fell earlier as a Labor Department report showed initial claims for unemployment benefits dropped by 11,000 to 457,000 in the week ended July 24, from a revised 468,000 the previous week. A Bloomberg News survey forecast a decline to 460,000.
U.S. gross domestic product growth slowed to 2.6 percent in the second quarter from 2.7 percent in the previous three months, according to the median estimate of 81 economists in a Bloomberg survey before the data are released tomorrow.
Fed Bank of Dallas President Richard Fisher said in a speech today in San Antonio that the U.S. economy faces a “slow slog” and further monetary accommodation may not help revive “dispirited” businesses.
St. Louis Fed President James Bullard said in a research paper the central bank should resume purchases of Treasury securities if the economy slows and prices fall rather than maintain a pledge to keep interest rates near zero.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net
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