Treasuries Rise as 10-Year Note Sale Draws More Foreign Central Bank Bids
Treasury 10-year note yields fell from the highest level since April as the government’s $24 billion auction of the debt drew the most demand on record from a class of investors that includes foreign central banks.
Indirect bidders bought 71.3 percent of the notes, compared with 53.6 percent in January and an average of 46.4 percent for the past 10 sales. Yields had climbed the most in more than two weeks yesterday after the Treasury’s three-year note auction attracted the lowest indirect bids since 2007 amid concern inflation is accelerating.
“The major severe selloff in the last couple of days provided some value for investors, and they came in at remarkable levels,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., one of 20 primary dealers that trades with the Fed. “This is the polar opposite of yesterday’s auction and was pretty remarkable. The biggest story is the indirect bid and dealers missed as bad as any kind off dealers can miss.”
The yield on the 10-year note dropped nine basis points, or 0.09 percentage point, to 3.65 percent at 5:02 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 rose 22/32, or $6.88 per $1,000 of face value, to 91 20/32.
The yield earlier touched 3.77 percent, the most since April 29. It rose 11 basis points yesterday, the most since Jan. 20.
Two-year note yields fell five basis points to 0.8 percent and snapped a seven-day streak, the longest since a 10-day drop that began Dec. 18 2009.
Fed Chairman Ben S. Bernanke told the House Budget Committee in Washington that the unemployment rate is likely to remain high “for some time,” indicating the central bank will maintain its policy of low interest rates and debt buying.
The Fed purchased $7.5 billion of securities due from February 2015 to June 2016 today, part of its $600 billion debt- purchase plan to bolster the economy, according to its website. The Fed will update its buying schedule tomorrow. The central bank has held its short-term interest rate target at almost zero since December 2008.
The 10-year note sale drew a yield of 3.665 percent, the highest since 3.9 percent in April, compared with a forecast of 3.725 percent in a Bloomberg News survey of eight of the Federal Rserve’s 20 primary dealers.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.23, compared with an average of 3.13 for the past 10 sales. The notes drew a yield of 3.665 percent, compared with a forecast of 3.725 percent in a Bloomberg News survey of eight of the Federal Reserve’s 20 primary dealers.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 0.5 percent of the debt, the fewest since at January 2009, compared with 8 percent at the January offering and a 10-sale average of 12.16 percent.
“Investors are looking to move out the curve and capture more income as yield levels have reached points investors deem attractive,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “This was as strong auction by all accounts and suggests that investors may think the market selloff off late has come close to its fulfillment.”
Foreign investors held 49.7 percent of the $8.75 trillion of public U.S. government debt outstanding as of November, according to the Treasury.
Yesterday’s $32 billion auction of three-year debt sold at 1.349 percent, the highest yield since May. The U.S. will sell $16 billion of 30-year bonds tomorrow, completing three note and bond auctions this week totaling $72 billion.
Bernanke told the House Budget Committee today that while the declines in the jobless rate in December and January “do provide some grounds for optimism,” he cautioned that “with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level.”
The extent to which the recovery is established and inflation is pointing higher or lower will help determine whether the Fed expands or pulls back on the stimulus, Bernanke said in response to questions.
“It’s hard to see how The Fed is going to do anything until the recovery is on track and until there is significant job creation, which means they will be accommodative for awhile,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG, a primary dealer.
Labor Department data on Feb. 4 showed the jobless rate fell to 9 percent last month, a 21-month low, and employers added 36,000 jobs, less than forecast.
Initial jobless claims are forecast to fall to 410,000 from 415,000 in the week ending Feb. 5, according to a forecast of 50 economists in a Bloomberg News survey.
Treasury 10-year notes returned 7.9 percent last year, compared with 5.9 percent for the overall Treasury market, according to Bank of America Merrill Lynch indexes.
To contact the editor responsible for this story: Dave Liedtka at email@example.com