Treasuries Decline 2nd Day on Weaker-Than-Average 5-Year Auction

Treasuries declined a second day as the U.S. sale of $35 billion in five-year notes was met with weaker-than-average demand amid speculation the Federal Reserve will reduce its bond purchases this year.

The debt’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.46, down from an average of 2.8 for the past 10 sales. The sale follows lower than demand at yesterday’s $35 billion auction of two-year notes. The U.S. will sell $39 billion in seven-year notes tomorrow.

“It’s a weak market having to absorb supply,” John Briggs, a U.S. government-bond strategist in Stamford, Connecticut, at Royal Bank of Scotland’s RBS Securities unit, one of the Fed’s 21 primary dealers required to bid at Treasury auctions. “Our bias is toward higher yields, and I think we can probably still keep testing higher.”

The yield on the current five-year note rose seven basis points, or 0.07 percentage point, to 1.38 percent, at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. It earlier added 10 basis points. The yield on the benchmark 10-year note gained eight basis points to 2.59 percent after earlier jumping 12 basis points. Both advances are the largest since July 5.

The Fed, which has been buying $85 billion in bond purchases a month to support the economy, will start trimming purchases in September, according to a survey of economists by Bloomberg News. In its first reduction, the Federal Open Market Committee will probably cut monthly bond buying to $65 billion, according to the July 18-22 survey of 54 economists.

Volume, Volatility

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was $344.5 billion, the most in a week and above the average of $277.5 billion in July.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was at 80.20, up from 72.62 on July 22, the lowest level since May 24. The figure is down from 117.89 on July 5, the highest since December 2010. The one-year average is 64.83.

The notes sold today drew a yield of 1.410 percent, compared with 1.484 percent last month, the most since July 2011, and a forecast of 1.413 percent in a Bloomberg News survey of seven primary dealers.

Bidder Participation

Indirect bidders, an investor class that includes foreign central banks, purchased 53.9 percent of the notes, the most since November 2009, and an average of 43 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.3 percent of the notes at the sale, compared with 3.6 percent at the last sale, the least since November 2009, and an average of 16.1 percent for the past 10 auctions.

Primary dealers bought 37.8 percent of the notes, the least since May.

Five-year notes have lost 1.9 percent this year, compared with a decline of 2.5 percent by Treasuries (USGG5YR) overall, according to Bank of America Merrill Lynch indexes. The five-year securities returned 2.3 percent in 2012, while Treasuries overall rose 2.2 percent.

The $35 billion in two-year debt was sold yesterday at a yield of 0.338 percent.

New Cash

This week’s sales, plus an auction of $15 billion of 10-year Treasury Inflation-Protected Securities last week, will raise $54.6 billion of new cash, as maturing securities held by the public total $59.4 billion, according to the U.S. Treasury.

Investors bid $2.92 for each dollar of the $1.228 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.

A manufacturing index (SPX) based on a survey of euro-area purchasing managers rose to 50.1 in July from 48.8 in June, London-based Markit Economics said today. Analysts in a Bloomberg survey predicted a reading of 49.1. A level of 50 is the dividing line between expansion and contraction. A report on services gave a reading of 49.6, versus analyst estimates for 48.7.

“We’re backing up a bit on the European purchasing managers index numbers,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, a primary dealer.

‘Consumer Demand’

U.S. new-home sales climbed 8.3 percent to an annualized pace of 497,000 homes, highest level since May 2008, the Commerce Department said in Washington. The median estimate of 77 economists surveyed by Bloomberg called for a gain to 484,000.

The Standard & Poor’s 500 Index of U.S. stocks traded near an all-time high as Apple Inc.’s profit topped estimates and forecasts from Boeing Co. and Ford Motor Co. exceeded predictions.

“Great earnings out of Apple and Ford” have added to selling pressure, said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “It’s just another sign that things are going well, and that will reverberate through the economy. There’s consumer demand for good products.”

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Jeff Marshall in New York at jmarshall75@bloomberg.net

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

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