Treasury Auction Bids Drop to Least Since 2009 as Yields Up
A measure of demand at the U.S. Treasury Department’s debt auctions has fallen this year to the lowest level since 2009 as a drop in bond prices generates the biggest losses on government securities in four years.
Investors bid $2.94 for each $1 of the $1.077 billion of notes and bonds sold by the Treasury this year, compared with a record high $3.15 of bids last year. It’s the first decline in demand at the auctions since 2008, when the U.S. government increased note and bond offerings 59 percent to $922 billion as the recession and the financial crisis deepened.
Diminished appetite for Treasuries comes as improving economic data has led to speculation the Federal Reserve may reduce the pace of its bond purchases. Investors searching for yield amid concern the 30-year bull market for bonds has ended indicate the U.S. government should anticipate fewer orders for its debt.
“Demand is somewhat more questionable for Treasuries at this point,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that are obligated to bid at U.S. government debt offerings. “The proximate cause is the idea that the Federal Reserve won’t be as involved in the market going forward and pulled forward their guidance for when they’ll be neutral on monetary policy.”
Treasury sold $29 billion of seven-year notes yesterday, drawing bids of $2.61 for $1 offered, compared with an average of $2.67 at the previous 10 sales.
Demand at all U.S. note and bond auctions has declined for five consecutive months starting in January, when investors bid 3.11 times the amount of Treasuries sold, falling to 2.7 times in June, the lowest ratio since August 2009, according to data released by the Treasury and compiled by Bloomberg.
The 10-year note yield has climbed 74 basis points this year, or 0.74 percentage point, to 2.50 percent at 9:11 a.m. in New York, according to Bloomberg Bond Trader prices. It reached 2.66 percent on June 24, the highest since August 2011.
Treasuries lost 2 percent in May, their worst monthly performance since December 2009, according to Bank of America Merrill Lynch’s U.S. Treasury Index.
They have plunged 2.8 percent in 2013, the biggest year-to-date losses to this point since 2009, when they dropped 4.5 percent through June.
“There is this quest for yield and people are going to migrate” away from Treasuries, said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston.
Pioneer has been underweight Treasuries in 2013 and is investing in short-term floating-rate notes and non-agency mortgage-backed securities, Schlanger said. The 10-year yield will likely end the year yielding between 2.5 percent and 3 percent, he said.
The last three times Treasuries suffered an annual loss were 2009, 1999 and 1994, according to Bank of America index data.
In 2009, yields rose following a $787 billion fiscal stimulus plan proposed by President Barack Obama and $1.75 trillion of monetary accommodation announced by the Fed in response to problems caused by the worst financial crisis since the Great Depression.
Yields climbed in 1999 as the impact of the collapse of Long-Term Capital Management LLC unwound. In 1994, the Fed surprised the market by raising its benchmark overnight borrowing rate to 5.5 percent at year end from 3 percent at the start of the year.
In response to questions May 22 in testimony to Congress, Fed Chairman Ben S. Bernanke indicated the central bank had given thought to reducing its stimulus at some point.
“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year,” Bernanke said June 19, referring to the Fed’s outlook for “moderate” economic growth, further labor-market gains and inflation accelerating toward the Fed’s 2 percent goal.
The economy has added an average of 189,000 jobs each month through May, the fastest pace since 2005 when it created 207,000 per month, Labor Department data show. The unemployment rate fell to 7.6 percent in May, from 8.1 percent in August.
“The data coming out is just really good on the economy and that keeps putting more pressure on everybody,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “Every piece of positive data that comes out will trickle into the employment rate and thus the Fed is correct in its assessment that we should start the tapering.”
Total marketable U.S. government debt has grown to $11.4 trillion in May from $4.4 trillion in July 2007 at the beginning of the financial crisis, Treasury data show. Outstanding debt declined in May by $19.4 billion, the first monthly reduction since September 2012.
The U.S. budget deficit will shrink this fiscal year to $642 billion, the smallest shortfall in five years, the nonpartisan Congressional Budget Office said in a May 14 report. The deficit will contract to 4 percent of gross domestic product, from 10.1 percent in fiscal 2009.
The CBO reduced its estimate of the likely shortfall, citing stronger-than-expected tax receipts. In February, it had projected a $845 billion deficit for the 2013 fiscal year, which ends Sept. 30. Last year’s deficit was $1.1 trillion.
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