Treasuries Drop After Note Sale Draws Lowest Demand in 10 Months

Treasuries fell, pushing yields toward 14-month highs, after a U.S. offering of $21 billion of 10-year notes drew the weakest demand since August amid bets the Federal Reserve will slow its bond buying.

The debt at the sale yielded 2.209 percent, the highest since October 2011. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.53, the least in 10 months. It was the second note sale this week to draw lower-than-average demand, and the U.S. will sell 30-year bonds tomorrow. Yields have surged since May on bets the economy is growing fast enough for the Fed to cut stimulus.

“The street stood back from this one to some degree,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “The street’s been beat up pretty badly” in the value of its fixed-income inventory.

The current 10-year yield increased four basis points, or 0.04 percentage point, to 2.23 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. It touched 2.29 percent yesterday, the highest since April 2012. The price of the 1.75 percent security due in May 2023 dropped 3/8, or $3.75 per $1,000 face amount, to 95 3/4.

The benchmark yield has increased from this year’s low of 1.61 percent set May 1.

Thirty-year bond yields climbed six basis points to 3.37 percent after reaching 3.43 percent yesterday, also the highest since April 2012.

Fed Purchases

“The lack of aggression with buying in the 10-year softens people’s expectations for the 30-year as well,” said Aaron Kohli, an interest-rate strategist BNP Paribas in New York, one of 21 primary dealers required to bid at Treasury auctions. “If demand is soft here, it’s likely to be soft there as well.”

The Fed is buying $85 billion of Treasuries and mortgage-backed securities each month to put downward pressure on borrowing costs and spur economic growth. It purchased $916 million of Treasuries today due from August 2023 to February 2031. That was 21.8 percent of the $4.2 billion offered by dealers, the lowest percentage since January.

The central bank will slow the buying to $65 billion a month at its October meeting, economists in a Bloomberg survey forecast last week.

The policy-setting Federal Open Market Committee is scheduled to meet June 18-19.

At today’s auction, indirect bidders, an investor class that includes foreign central banks, purchased 51.7 percent of the notes, the most since December 2011, compared with an average of 35.8 percent for the past 10 sales.

‘More Uncertainty’

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11.7 percent of the notes, the least since September, compared with an average of 21.2 percent at the last 10 auctions.

Primary dealers were awarded 36.6 percent of the offering, compared with 49.2 percent at the May sale, the highest since January.

“There doesn’t seem to be a great deal of sponsorship at these levels,” said Kevin Flanagan, chief fixed-income strategist in Purchase, New York, for Morgan Stanley Smith Barney. “There seems to be less conviction and more uncertainty. There seems to be some trepidation stepping in, especially in front of the FOMC meeting.”

Demand for Treasuries at auction has slackened this year amid signs of improvement with the U.S. economy. Investors have bid $2.97 for each dollar of debt sold at the U.S. government’s $958 billion in Treasury notes and bonds sold at auction, compared with a record bid-to-cover ratio of $3.15 set in 2012, according to Treasury data compiled by Bloomberg.

Volatility, Volume

The U.S. sold $32 billion of three-year notes yesterday at a yield of 0.581 percent. A Bloomberg News survey of traders before the auction projected 0.575 percent. The bid-to-cover ratio was 2.95, the least since December 2010.

The government will auction $13 billion of 30-year securities tomorrow.

The yield on 10-year Treasury Inflation-Protected Securities rose to 0.12 percent, up from negative 0.93 percent in December and the highest since October 2011. The gap between 10-year yields on TIPS and Treasuries not indexed for inflation narrowed to 2.06 percentage points, the smallest since July.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE Index (BUSY) was at 81.89, after rising to 84.75 on June 6 and June 10, the highest level in almost a year. It has averaged 62.4 during the past 12 months.

Trading volume has been increasing, with the amount changing hands through ICAP Plc, the largest inter-dealer broker of U.S. government debt, averaging $397 billion a day from the start of May through yesterday. That’s up from an average of $281 billion in the first four months of the year.

The difference between yields on 10- and 30-year debt touched 1.12 percentage points today, the narrowest since September, before increasing to 1.14 percentage points. The one-year average is 1.17 percentage points.

Historically, a so-called steeper yield curve reflects diminishing demand from investors anticipating faster economic growth and inflation.

U.S. securities lost 1.2 percent this year through yesterday, according to the Bloomberg U.S. Treasury Bond Index. German bunds declined 1.2 percent and U.K. gilts dropped 2 percent, separate indexes show.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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

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