Treasury Demand Weakens at Note Sales Amid Fed Taper Speculation

Treasury’s sale of $99 Billion in two-, five- and seven-year notes this week met with weaker-than-average demand amid speculation the Federal Reserve may indicate a reduction of its bond-buying program.

The bid-to-cover ratio on the $29 billion in seven-year notes sold yesterday, which gauges demand by comparing the amount bid with the amount offered, was 2.54, the lowest since May 2009. The ratios were also below the averages of the prior 10 auctions on the sales of $35 billion in five-year and $35 billion in two-year notes the preceding two days.

“The drop in the bid-to-cover would seem to confirm uncertainty about near term direction in rates, especially with the Fed’s FOMC meeting scheduled for next week,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC, said in a report yesterday. Miller said the “mixed performance” of the seven-year securities, which saw lower aggregate demand and higher non-dealer bidding at the auction.

The seven-year notes maturing in July 2020 were sold at what’s known as a high yield of 2.026 percent, compared with a forecast of 2.03 percent in a Bloomberg News survey of seven of the 21 primary dealers that trade with the Fed and are required to bid at U.S. debt auctions.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 16.6 percent of the notes at the seven-year note sale, compared with an average of 19.1 percent for the past 10 auctions. At the June sale, direct bidders purchased 15.7 percent of the securities, the lowest since July 2012.

Lower Demand

The U.S. sale of two-year notes on July 23 drew a direct bid of 16.4 percent, compared with an average of 23.9 percent at the past 10 sales.

Investors bid $2.91 for each dollar of the $1.257 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.

Demand from indirect bidders, an investor class that includes foreign central banks, were higher than average for all three auctions. The buyers purchased 48.6 percent of the notes at the seven-year note sale, the most since August 2011, and compared with an average of 38.6 percent for the past 10 sales.

Indirect bidders purchased 30.4 percent of the two-year notes, lower than the 35.8 percent at the June sale although higher than the average of 25.2 percent at the past 10 sales. They purchased 53.9 percent of the notes at the five-year note sale, the most since November 2009, and compared with an average of 43 percent for the past 10 sales.

FOMC Speculation

Fed Chairman Ben S. Bernanke told congressional panels this month it was “way too early to make any judgment” about whether the biggest buyer of Treasuries will start cutting back in September.

None of the 54 economists surveyed by Bloomberg from July 18-22 predicted the Federal Open Market Committee will begin reducing its monthly purchases at its meeting scheduled for July 30-31.

In its first reduction, the FOMC will probably cut monthly bond buying to $65 billion, according to the survey. Economists see purchases divided between $35 billion in Treasuries and $30 billion in mortgage-backed securities.

To contact the reporters on this story: Jeff Marshall in New York at jmarshall75@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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