Treasuries Rise as U.S. Auction of Five-Year Notes Draws Record Low Yield
Sept. 28 (Bloomberg) -- Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank, discusses Irish, Portuguese and Belgian bonds. He speaks with Maryam Nemazee on Bloomberg Television's "Countdown." (Source: Bloomberg)
Treasuries gained as the government’s $35 billion sale of five-year notes drew the lowest yield since the government began quarterly offerings of the securities in 1976.
The yield on the current five-year debt fell to the lowest level in almost two years as a drop in consumer confidence spurred speculation that the Fed will increase purchases of Treasuries to support the economy. The securities were auctioned today at a yield of 1.260 percent, compared with the 1.276 percent average forecast in a Bloomberg News survey of 8 of the 18 primary dealers obligated to participate in U.S. debt sales.
“You have new pieces of uncertainty, with the Fed and quantitative easing 2 priced in,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “With the volatility in the marketplace, you’re going to see the Treasury market well-bid.”
The current five-year note yield dropped 6 basis points, or 0.06 percentage point, to 1.23 percent at 4:18 p.m. in New York, according to BGCantor Market Data. The price of the 1.25 percent security maturing in August 2015 gained 9/32, or $2.81 per $1,000 face amount, to 100 3/32.
The yield touched 1.22 percent, the lowest level since Dec. 17, 2008, the day after the Fed cut its target lending rate to zero to 0.25 percent. Yields on two-year notes dropped 2 basis points to 0.43 percent, compared with the record low of 0.41 percent reached on Sept. 22. Benchmark 10-year note yields slid 6 basis points to 2.47 percent.
Flatter Yield Curve
The extra yield investors pay to hold 10-year notes over 2- year debt dropped to 2.04 percentage points, the narrowest spread since Aug. 31, reflecting concern the U.S. economic recovery is stalling.
“What’s going on further out the curve is a function of the idea that the Fed’s going to be out there buying,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. The Fed’s “going to continue to be a constant buyer in the Treasury market and presumably keep rates contained through that process,” he said.
At today’s auction, indirect bidders, an investor class that includes foreign central banks, purchased 50.1 percent of the notes, compared with 50.8 percent at the last auction on Aug. 25 and an average of 46 percent in the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 8.7 percent, matching the share in August.
Auction Demand
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.96, compared with an average of 2.74 at the past 10 auctions.
Yesterday’s $36 billion auction drew a record-low yield of 0.441 percent and a bid-to-cover ratio of 3.78, the highest since August 2007. The government will auction $29 billion of seven-year debt tomorrow.
Treasuries rose earlier as the Conference Board’s confidence index declined in September to 48.5, the lowest level since February. The median forecast of 75 economists in a Bloomberg News survey was for a drop to 52.1.
The Fed announced following its Sept. 21 meeting that it’s prepared to do more to help the economy, spurring speculation policy makers will add securities to the central bank’s holdings by increasing their Treasury purchases under a policy known as quantitative easing.
The central bank retained last week its stance from its Aug. 10 meeting of keeping its portfolio of securities stable at about $2 trillion to keep money from draining out of the financial system. The Fed bought $550 million of Treasury Inflation Protected Securities today, increasing the total amount of U.S. debt purchased since Aug. 17 to $34.612 billion.
Bank of England
The Bank of England should restart its asset-purchase program to prevent persistent slow economic growth, said Adam Posen, a policy maker, in a speech today in Hull, England.
U.S. debt securities were supported as investors speculated that the ballooning cost of rescuing Dublin-based Anglo Irish Bank Corp. will force Ireland’s government to choose between fully repaying senior bondholders and tackling the region’s biggest budget deficit.
Credit-default swaps tied to Irish bonds jumped as much as 30.5 basis points to 521.5 after more than doubling in the past two months, and were at 496 basis points as of 1:40 p.m. in London, according to data provider CMA. Contracts on Anglo Irish rose 1.5 basis points to 937.5, implying a 56 percent probability of default within five years, after earlier climbing to an all-time high of 960.5.
Ten-year Treasuries have returned 14.3 percent this year and 4.5 percent in the third quarter, according to Bank of America Merrill Lynch indexes. The S&P 500 Index has increased 11 percent since the end of June.
“The market’s not trading on relative value,” said John Fath, a principal at BTG Pactual in New York. “When you’re buying five-year notes at 1.25, you’re thinking the Fed’s on hold for three or four years.”
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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