Treasuries Approach Record Low After Note Auction, Fed Minutes
Treasury 10-year note yields approached all-time lows after the U.S. sold $21 billion of the securities at a record rate and minutes from the Federal Reserve’s last meeting showed some members favor more stimulus.
The auction attracted record high demand from a group of investors that include pension funds and insurance companies. The notes drew a yield of 1.459 percent, compared with a forecast of 1.518 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The previous record low auction yield of 1.622 percent was set last month.
“There is a grab for high-quality paper internationally,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse AG, one of 21 primary dealers that bid at the auction. “With things in Europe not getting better, and the data in the U.S. softening, demand for Treasuries is high and going to stay that way.”
The yield on the 10-year note rose one basis point, or 0.01 percentage point, to 1.52 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. It touched 1.45 percent after setting a record low of 1.4387 percent on June 1. The 1.75 percent security due in May 2022 fell 1/8, or $1.25 per $1,000 face amount, to 102 1/8.
A Bloomberg survey of economists projects the median yield on the 10-year note will rise to 1.9 percent by year-end, down 0.2 percent from the previous survey. The low forecast is 1.4 percent and the high is 3.3 percent.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, at today’s auction was 3.61, the highest since April 2010, compared with 3.06 percent in June and an average of 3.07 for the past 10 sales.
Direct bidders were awarded 45.4 percent of the debt, the most for any offering of U.S. government coupon securities on record. The $9.53 billion purchased was $5.16 billion more than at the previous offering on June 13. The previous record for direct demand at a 10-year note sale was 31.7 percent at the August 2011 auction.
“We don’t know and we won’t know” the source of that demand, said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “Given the sheer size, it’s unlikely a dozen people all decided to come in and it just is coincidental. So the shadow of suspicion is cast on a player or two.”
Since the start of 2012, direct bidders have won an average 21.1 percent of the debt sold at Treasury 10-year auctions. The next highest direct demand has come at 30-year bond sales, with an average award to direct bidders of 14.9 percent.
Indirect bidders, an investor class that includes foreign central banks, purchased 40.6 percent of the securities at today’s sale, compared with an average of 42.2 percent for the past 10 offerings of 10-year notes.
Primary dealers won 14 percent of the offering, the fewest for the auction of any U.S. government coupon security on record.
The U.S. will auction $13 billion of 30-year bonds tomorrow after a $32 billion three-year note sale yesterday. That offering drew a yield of 0.366 percent, compared with a forecast of 0.383 percent in a Bloomberg News survey of seven primary dealers.
Benchmark yields had climbed from a five-week low after the term premium, a model created by the Federal Reserve that includes expectations for interest rates, growth and inflation, showed Treasuries are the most expensive ever. The gauge fell to a record negative 0.96 percent yesterday.
“There’s still uncertainty to come,” said Sean Simko, who manages $8 billion at SEI Investments Co. (SEIC) in Oaks, Pennsylvania. “There still remain headwinds, and slow economic growth is driving the bid.”
A U.S. report on July 6 showed the economy added 80,000 jobs in June, less than the 100,000 projected by a Bloomberg News survey of economists. The unemployment rate held steady at 8.2 percent.
A few Fed policy makers said the central bank will probably need to take more action “to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee’s goal,” according to the record of the Federal Open Market Committee’s June 19-20 gathering released today in Washington.
Policy makers at that meeting extended by $267 billion the Fed’s Operation Twist program, designed to put downward pressure on long-term interest rates. The Fed bought $4.77 billion of securities due from July 2018 to June 2019 today as part of the program, with primary dealers submitting offers equaling 4.02 times the securities bought. The average ratio is 2.93 since the central bank began the program in October 2011.
The Fed has purchased $2.3 billion of mortgage and Treasury debt in two separate rounds of quantitative easing, or QE. Stocks fell today after a third round of asset purchases wasn’t more strongly signaled.
“People thought they would be more aggressive,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “We knew there was going to be the need for more stimulus, but they haven’t said it’s coming out anytime soon.”
Investors have poured into the world’s safest government securities amid Europe’s debt crisis. Germany’s borrowing costs dropped to the least on record today at a sale of 4.15 billion euros ($5.1 billion) of 10-year debt. The nation sold the securities at a yield of 1.31 percent, down from 1.52 percent at a June 13 sale, according to a statement from the Bundesbank.
Ten-year U.S. debt has returned 5 percent this year, double the 2.5 percent gain in the broader Treasury market. The notes returned 17 percent in 2011, compared with a 9.8 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., held holdings of Treasuries and mortgages steady in June after saying that U.S. securities are still the safest bet.
“Don’t underweight Uncle Sam in a debt crisis,” Gross wrote in his monthly investment outlook posted on the Newport Beach, California-based company’s website on June 28. “Money seeking a safe haven will find it in America’s deep and liquid, almost Aaa rated, bond and equity markets.”
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