Treasuries Drop as Five-Year Note Sale Attracts Lowest Demand Since June
Dec. 27 (Bloomberg) -- Frank Lesh, a trader for FuturePath Trading LLC, talks about the impact of the Federal Reserve's purchase of Treasuries on investor sentiment. Lesh speaks with Adam Johnson on Bloomberg Television's "InBusiness." (Source: Bloomberg)
Treasuries tumbled, pushing benchmark 10-year note yields up the most in two weeks, after the $35 billion sale of five-year securities attracted the lowest demand since June.
U.S. debt due in more than a year was headed for the biggest monthly loss in the global government bond market as primary dealers ended up with their biggest share of an auction of the five-year maturity since July 2009. The two-year note yield increased to the highest level in six months.
“Foreigners weren’t as aggressive at the sale as usual, leaving a lot for primary dealers,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors. “It’s not looking good for the seven-year auction tomorrow.”
The yield on the current five-year note increased 12 basis points, or 0.12 percentage point, to 2.15 percent at 5 p.m. in New York, according to BGCantor Market Data. The price of the 1.375 percent security maturing in November 2015 fell 18/32, or $5.63 per $1,000 face amount, to 96 13/32.
The five-year note yield reached 2.16 percent on Dec. 16, the highest level since June 3, advancing from the record low of 1.0148 percent touched on Nov. 4. The yield dropped three basis points yesterday following the strongest demand at a two-year note auction in three months.
A drop of one point in the 10-year note pushed the yield up as much as 15 basis points to 3.48 percent today in the biggest intraday gain since Dec. 14, when the Federal Reserve cited signs of recovery after its policy meeting.
Two-Year Note
The two-year note yield increased as much as 11 basis points to 0.75 percent, the highest level since June 16. A two- point decrease in the 30-year bond sent the yield up as much as 15 basis points to 4.55 percent.
U.S. notes and bonds have handed investors a 2.1 percent loss in December, paring the annual return to 5.7 percent, according to figures compiled by Bloomberg and the European Federation of Financial Analysts Societies. That’s the worst monthly performance among 26 sovereign indexes.
The auction of the December 2015 maturity today drew a yield of 2.149 percent, compared with 1.411 percent for the Nov. 23 sale. The increase of 74 basis points is the biggest since the jump of 120 basis points from June 2003 to August 2003, when the Treasury adopted monthly offerings of five-year securities.
Today’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.61, the lowest since 2.58 in June.
Primary Dealers
Primary dealers, companies obligated to participate in U.S. auctions, bought 58.2 percent of the five-year sale, the most since they purchased 61.6 percent in July 2009. Indirect bidders, an investor class that includes foreign central banks, purchased 35.6 percent of the notes, compared with 31.5 percent last month and an average of 42.3 percent for the past 10 sales.
“The auction was much weaker than expected, and primary dealers had to take down much more than normal,” said Rohit Garg, an interest-rate strategist in New York at BNP Paribas Securities SA, a primary dealer. “Going into year-end, lots of players weren’t very comfortable taking on the risk to their balance sheet.”
Treasuries rallied yesterday after the U.S. government’s $35 billion auction of two-year securities drew strong demand. Bidding was 3.71 times the debt available, the highest since a reading of 3.78 on Sept. 27. The U.S. plans to sell $29 billion of seven-year debt tomorrow.
Global Bonds
An index of global bonds was poised to fall for a fourth month, the longest decline in two years, on speculation quickening economic growth will lead stocks to outperform debt in 2011. The gauge has declined 2.2 percent since the end of August, according to Bank of America Merrill Lynch figures.
The Standard & Poor’s 500 Index has gained 20 percent during the period, according to data compiled by Bloomberg. The index advanced 0.1 percent today.
Retail sales, excluding autos, rose 5.5 percent from Nov. 5 through Dec. 24, said MasterCard Advisors’ SpendingPulse, which measures retail sales by all payment forms. That compared with a 4.1 percent gain a year earlier. The numbers include sales made over the Internet.
“The economic recovery should continue into the new year, sending the unemployment rate down to 8.6 percent at the end of 2011,” said Michael Pond, co-head of interest-rate strategy at Barclays Plc in New York, in an interview with Deirdre Bolton on Bloomberg Television’s “InsideTrack” program.
Employers added fewer jobs than forecast in November, and the unemployment rate rose to 9.8 percent, the Labor Department reported Dec. 3.
The Conference Board’s consumer sentiment index unexpectedly decreased to 52.5 this month from a revised 54.3 in November, the New York-based research group said today.
The Fed bought $6.78 billion of Treasuries maturing from July 2013 through November 2014 as part of its effort to add $600 billion to the economy through June under the second round of quantitative easing.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net
To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net
Rate this Page