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Treasury 5-Year Note Yields at Almost 4-Month Low Before Sale

Treasury five-year note yields fell to almost the lowest level since June amid speculation demand at a $35 billion sale of the securities will be boosted on bets the Federal Reserve will maintain stimulus.

Benchmark 10-year notes erased earlier losses after consumer confidence declined to the lowest level since April, wholesale prices unexpectedly fell and retail sales declined. Fed policy makers start a two-day meeting today at which they are expected to maintain the central bank’s monthly $85 billion debt purchase program. The government will conclude this week’s auctions with $29 billion of seven-year notes tomorrow.

“What they are hoping for is to spur some type of inflation -- we’re not getting it, and that’s very bad for the tapering crowd,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “It keeps pushing us off further into later months.”

The five-year yield fell two basis points, or 0.02 percentage point, to 1.27 percent at 11:47 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.375 percent note due in September 2018 rose 2/32, or 63 cents per $1,000 face amount, to 100 15/32. Yields dropped to 1.25 percent on Oct. 23, the least since June 19.

Yields on 10-year notes were at 2.52 percent.

Notes Auction

The five-year notes scheduled for sale today yielded 1.30 percent in pre-auction trading, compared with 1.436 percent at the previous sale of the securities on Sept. 25. Investors bid for 2.67 times the amount of available debt last month, up from 2.38 times in August.

“It’s going to go well,” Franzese said. “We have a nice concession. It’s a good buy-level.”

The price gains on the five-year note made the securities the most expensive in four months relative to two- and 10-year debt. The butterfly spread, which measures differences between the yields, was at negative 29.6 basis points, a level not seen since June 18 based on closing prices.

The two-year yield was little changed at 0.32 percent. Prices of longer-dated securities tend to rise or fall more than shorter-maturity debt when interest rates shift.

The difference between the yields reflects increased demand for the middle security over the outliers. Five-year notes offer more yield than shorter-maturity Treasuries, while 10-year debt is susceptible to the risk that inflation will quicken over the coming decade.

Investor ‘Appetite’

“With the tapering postponed until maybe spring of next year, this means there is more appetite for this five-year than maybe there was a few months ago,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “The market will not move very far away from current levels” as investors await the result of the Fed meeting, he said.

The Treasury sold $32 billion of two-year securities yesterday. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, climbed to 3.32, the highest level since April.

Investors in Treasuries were short for the first time since Sept. 9, betting that the prices of the securities will drop, according to a survey by JPMorgan Chase & Co.

The proportion of net shorts rose to four percentage points in the week ending yesterday, according to JPMorgan. The survey had been net long for six straight weeks.

The percent of outright shorts, or bets the securities will fall in value, rose to 23 percent as of yesterday, from 15 percent the previous week, the survey said. The percent of outright longs dropped to 19 percent, from 23 percent. Investors cut neutral bets to 58 percent, the lowest level since June 3, from 62 percent the previous week.

Volatility Drops

Price swings of Treasuries indicate most bondholders aren’t anticipating a sudden jump in borrowing costs. Bank of America Merrill Lynch’s MOVE Index, a measure of volatility, was at 58.54 yesterday, the least since May 16. It has fallen from this year’s high of 117.89 in July.

The Conference Board’s index of consumer confidence fell to 71.2 in October from 80.2 the month prior, the New York-based private research group said. The median forecast in a Bloomberg survey of economists called for a reading of 75. Estimates of 74 economists ranged from 70 to 82. The Conference Board’s index averaged 53.7 in the recession that ended in June 2009.

The 0.1 percent decrease in the producer price index followed a 0.3 percent gain the prior month, a Labor Department report showed. The median estimate in a Bloomberg survey of 80 economists called for a 0.2 percent advance. The so-called core measure, which strips out volatile food and fuel, increased 0.1 percent after being unchanged in August.

Retail sales dropped 0.1 percent, Commerce Department figures showed, restrained by the biggest decrease at auto dealers since October 2012, as purchases early in the month were included in the August data.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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