Treasuries Fall as Seven-Year Note Demand Is Least Since 2009

Treasuries declined after the U.S. sale of $29 billion in seven-year notes drew of the least demand since May 2009.

The current seven-year note yield reached two-month high as the auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.56, compared with the average of 2.76 for the previous 10 sales. Benchmark 10-year notes dropped for a second day after the Federal Open Market Committee, in its last policy meeting before the Nov. 6 presidential election, issued a statement yesterday without saying whether it will continue with Treasury purchases after the expiration of its so-called Operation Twist in December.

“The seven-year note auction was a little softer than average, which does underscore there is more pressure building on the market,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers required to bid at the auctions. “There is less scope for a blow up in Europe, the economy has improved some, and there is a thought that if Mitt Romney wins yields will rise, all of which threatens the recent range.”

The yield on the current seven-year note rose five basis points, or 0.05 percentage point, to 1.26 percent at 5:02 p.m. in New York trading, according to Bloomberg Bond Trader prices. The 1 percent note maturing in September 2019 declined 10/32, or $3.13 per $1,000 face amount, to 98 9/32.

Benchmark Yields

Benchmark 10-year note yields rose three basis points to 1.82 percent, and reached the highest level since Sept. 17.

Treasuries pared losses after two major technology companies posted earnings that trailed forecast, raising concern the economy may struggle to accelerate.

“Apple and Amazon both missed earnings, and that is not a good sign as those are two important companies to gauge for the health of the U.S. economy, which gives a slight boost to the Treasury market,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC a New York-based brokerage for institutional investors.

U.S. debt briefly pared losses earlier on speculation Fitch Ratings would reduce its debt rating for the U.S. The company reiterated later its negative outlook on the U.S.’s AAA credit ranking is unlikely to change before late 2013, as it waits to assess any deficit-reduction plans after the Nov. 6 elections.

Auction Results

The seven-year notes sold today drew a yield of 1.267 percent, compared with a forecast of 1.262 percent in a Bloomberg News survey of six of the Federal Reserve’s 21 primary dealers.

“The securities cheapened up coming into the sale, and there is still a lot of uncertainty,” said William O’Donnell, head U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, a primary dealer.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 18 percent of the notes, the most since February and compared with an average of 13.9 percent at the last 10 auctions. Indirect bidders, an investor class that includes foreign central banks, purchased 38.2 percent of the notes, compared with an average of 40.1 percent for the past 10 sales.

Seven-year notes have returned 3 percent this year, compared with a 1.7 percent gain by the broader Treasuries market, according to Bank of America Merrill Lynch indexes. The seven-year securities returned 13.7 percent in 2011, while Treasuries overall gained 9.8 percent.

Debt Sales

Today’s offering is the third of three note auctions totaling $99 billion this week. The government sold $35 billion of two-year debt on Oct. 23 at a yield of 0.295 percent and the same amount of five-year securities yesterday at a yield of 0.774 percent.

Structural headwinds, the budget deficit and the fiscal cliff will dominate the economic debate no matter who wins the presidential election, said Pacific Investment Management Co.’s Bill Gross.

“It means lower growth,” Gross, who runs the world’s biggest bond fund, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “The structural issues are really related to an excessive amount of debt, an excessive amount of leverage that’s been built up over 10 or 20 years.”

Bookings for non-defense capital goods excluding aircraft, considered a proxy for future business spending, were little changed last month after rising 0.2 percent in August, less than previously estimated, a Commerce Department report showed today in Washington. Demand for all durable goods climbed 9.9 percent last month, exceeding the median forecast of economists surveyed by Bloomberg and reflecting a rebound in airplane orders.

Economic Reading

“Those were a weak set of numbers,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “It is contributing more to a depressed willingness to buy strength than a desire to sell weakness.”

U.S. gross domestic product rose at a 1.8 percent annual rate in the third quarter after expanding at a 1.3 percent pace the prior three months, the median economist estimate showed before data from the Commerce Department tomorrow. That would be the first back-to-back readings lower than 2 percent since the U.S. was emerging from the recession in 2009.

The Fed said yesterday unemployment remains elevated as it maintained $40 billion in monthly purchases of mortgage-backed securities aimed at spurring the three-year expansion. The central bank is swapping short-term Treasuries in its holdings for longer-term securities, a program known as Operation Twist, to cap yields as part of its efforts.

The Fed bought $4.74 billion of notes due from November 2020 to August 2022 today, according to the Fed Bank of New York’s website.

Yield Outlook

Ten-year yields will climb to 2.06 percent by June 30, according to a Bloomberg survey.

Volatility dropped to 67 basis points yesterday, below this year’s average of 72.4 basis points, according to the latest data available from Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options. It touched 57.5 basis points on Sept. 19, the least since May 7. The average during the past decade is 99.6 basis points.

“Market technicals aren’t great for Treasuries right now as we are near the high of the recent yield range and continue to want to test it,” RBS’s O’Donnell said. “Part of that is due to the potential that Romney might pull out the presidency, which most people associate with higher yields and higher risk markets.”

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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