Investors Purchase Biggest Share in Year at Treasury 2-Year Sale

Investors bought the biggest share in a year of an auction of Treasury two-year notes as demand for the securities climbed less than two weeks after a partial government shutdown raised concern of a potential U.S. default.

The notes at yesterday’s sale yielded 0.323 percent, the lowest since May. Primary dealers, who must bid in U.S. debt sales, purchased 40 percent of the securities, the least since October 2012. The government reopened Oct. 17 after a last-minute deal by lawmakers funded operations and extended U.S. borrowing authority into early 2014. The Federal Reserve, which refrained last month from slowing stimulus to await further evidence of economic recovery, opens a two-day meeting today.

“All of the uncertainty that remains ahead with debt ceiling and the budget debate is putting a wrench in the Fed’s plan to taper, and helped auction demand,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of the Fed’s 21 primary dealers. “With the relaxation of earlier default fears, we still have the safety bid present regarding the future.”

Current (USGG2YR) U.S. two-year note yields were little changed at 0.30 percent yesterday in New York, according to Bloomberg Bond Trader Prices. The 0.25 percent securities due in September 2015 traded at 99 29/32.

The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.32, the highest since April, versus an average of 3.3 for the past 10 sales.

Bidder Participation

Indirect bidders, an investor class that includes foreign central banks, purchased 29 percent of the notes, the most since the July auction, compared with an average of 23 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 31 percent, the most since February. The average for the past 10 auctions was 22.4 percent.

“There was a strong reception to the auction, with strong nondealer demand,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We have ongoing uncertainty, policy still headed into the end of the year, and the economic data, while delayed, certainly hasn’t been robust, which continues to underpin demand in the front end.”

The Fed won’t begin to slow the pace of its $85 billion in bond purchases until March, according to economists surveyed by Bloomberg News Oct. 17-18.

‘Grade A-’

A government report last week showed U.S. payrolls rose by 148,000 in September, versus the median forecast in a Bloomberg survey for a gain of 180,000 jobs. The data indicated the economy lost momentum leading up to the 16-day government shutdown, which Standard & Poor’s estimated shaved at least 0.6 percent off fourth-quarter growth.

“Last week’s lackluster data might have served to keep the bullish momentum intact in rates,” George Goncalves, New York-based head of interest-rate strategy at the primary dealer Nomura Holdings Inc., wrote in a note to clients. “Overall, we assign a grade A- to this auction.”

The size of yesterday’s note sale was cut by $1 billion for the third straight month, the longest stretch of reductions since October 2010. The amount of the securities sold each month peaked at $44 billion from October 2009 through April 2010.

A Bloomberg News survey of eight primary dealers forecast an auction yield of 0.322 percent.

Two-year notes have gained 0.3 percent this year, compared with a decline of 1.8 percent by the broader Treasuries market, according to Bank of America Merrill Lynch indexes. The two-year notes returned 0.3 percent in 2012, while Treasuries overall rose 2.2 percent.

The government will sell $35 billion in five-year debt today and $29 billion in seven-year securities on Oct. 30.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

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

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