Treasuries Tumble as U.S. Note Auction Attracts Lower-Than-Average Demand

Treasuries dropped as the U.S. sold $29 billion in seven-year securities to lower-than-average demand in the final of seven auctions of $177 billion of notes, bonds and inflation-indexed debt over the past two weeks, the most ever.

The debt drew a yield of 1.430 percent, compared with a forecast of 1.423 percent in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.68, versus 3.2 last month and an average of 2.83 at the past 10 auctions. Ten-year yields earlier rose on bets a European Central Bank loan program would help stem the euro region’s debt crisis.

“It was a pretty weak auction,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., which as a primary dealer is obliged to bid in U.S. debt sales. “It’s setting a bad tone for the balance of the year. It was the last coupon auction that investors could have bought at, and they didn’t come in with force.”

Current seven-year note yields rose three basis points, or 0.03 percentage point, to 1.41 percent at 1:17 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 1.42 percent, the highest level since Dec. 14.

Ten-year yields increased four basis points to 1.96 percent and touched 1.98 percent, the highest since Dec. 14. They fell earlier to as low as 1.89 percent.

Foreign Bidders

The Nov. 23 offering of seven-year notes drew a record low yield of 1.415 percent, and securities at the October sale yielded 1.791 percent.

At today’s auction, indirect bidders, an investor class that includes foreign central banks, purchased 42 percent of the notes, compared with an average of 42.5 percent for the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 12.9 percent, versus an average of 10.8 percent at the past 10 auctions.

Seven-year Treasuries have returned 13.2 percent this year, compared with a 9.6 percent gain by the broader Treasury market, according to Bank of America Merrill Lynch Indexes.

The U.S. sold $35 billion yesterday of five-year debt at a record low yield of 0.88 percent. It auctioned an equal amount of two-year notes the previous day at a yield of 0.24 percent, up from a record low 0.222 percent in August.

The government last week auctioned $78 billion in notes, bonds and inflation-linked debt.

Fed Sales

It sold $12 billion in five-year Treasury Inflation Protected Securities Dec. 15 at a record low yield of negative 0.877 percent. A $13 billion sale of 30-year bonds Dec. 14 drew a record low yield of 2.925 percent and a bid-to-cover ratio of 3.05, the highest in 11 years. Auctions of 10- and three-year notes also drew higher-than-average demand as investors sought refuge.

U.S. 30-year bond yields rose earlier as much as four basis points to 2.97 percent as data showed sales of existing homes in the U.S. rose more than forecast. The National Association of Realtors reported the sales increased 4 percent to a 4.42 million annual pace, versus a 2.2 percent gain forecast in a Bloomberg News survey.

Ten-year note yields erased earlier increases amid fading optimism the ECB’s three-year loans to euro-area banks will restore confidence in sovereign borrowers. The central bank awarded 489 billion euros ($645 billion) in 1,134-day loans in its longer-term refinancing operation, the most ever in a single operation and more than the median estimate of 293 billion euros in a Bloomberg News survey.

‘Wait-and-See Mode’

“The market is in a wait-and-see mode with respect to Europe, and the only thing that has kept the market from going lower in yield has been better U.S. data,” said Dan Greenhaus, chief global strategist at BTIG LLC in New York. “Still, we’ve seen pretty decent auctions overall suggesting that there is still robust demand for Treasuries, even at lower yield levels, given the persistent concerns from overseas.”

The Fed sold $8.12 billion of Treasuries due in 2013 and 2014 in the first of two sales today. It will sell as much as $8.75 billion of debt due in 2013 in the second sale. The central bank is replacing $400 billion of short-term debt in its portfolio with longer-term securities in a program to lower borrowing costs.

To contact the reporters on this story: Susanne Walker in New York at swalker33@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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