U.S. Bond Demand Declines as Investors Favor Shorter-Term Debt

Treasury’s auction of $16 billion in 30-year bonds drew lower-than-average demand as investors favored the three- and 10-year note sold this week on signs the Federal Reserve will push on with its bond-buying stimulus.

The bid-to-cover ratio at yesterday’s bond sale, which gauges demand by comparing the amount bid with the amount offered, was 2.16, the least since August and less than the average of 2.48 at the past 10 auctions. The sale attracted the lowest demand in seven months from indirect bidders, a class of investors that includes foreign central banks. A $24 billion sale of 10-year notes on Nov. 13 attracted the most demand in five months from indirect bidders while a $30 billion auction of three-year notes on Nov. 12 saw the most demand since March.

Treasuries strengthened yesterday after Fed Chairman-nominee Janet Yellen told Congress she will promote the central bank’s unprecedented stimulus program until economic growth is stronger. Inflation control is important and the central bank’s bond-buying program “will not continue indefinitely,” Yellen testified yesterday at her confirmation hearing to lead the Fed.

“In a recovering economy, rates tend to drift higher over time,” said Zach Pandl, a Minneapolis-based senior interest-rate strategist at Columbia Management Investment Advisers, which oversees $340 billion. “The activist Fed is already priced in.”

Market Prices

The current 30-year yield dropped three basis points, or 0.03 percentage point, to 3.79 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.625 percent bond due in August 2043 rose 18/32, or $5.63 per $1,000 face amount, to 97 1/8. The yield fell as much as six basis points.

Investors have bid $2.87 for each dollar of the $1.855 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.

The 30-year bond sale drew a yield of 3.81 percent, compared with the 3.793 percent average forecast in a Bloomberg News survey of seven of the Fed’s 21 primary dealers.

Indirect bidders purchased 35.3 percent of the bonds, the lowest level since April. Direct bidders bought 18.3 percent of the securities, the lowest level since August.

Auction Demand

At the 10-year sale the previous day, indirect bidders purchased 47.7 percent of the notes, the highest level since the June 12 offering of the securities and higher than an average of 38.7 percent for the past 10 sales.

At the three-year sale, investors bid 3.46 times the amount of debt on offer, exceeding the average bid-to-cover ratio, as the measure is known, at the previous 10 auctions of 3.32 times.

Indirect bidders purchased 33.3 percent of the three-year notes sold, compared with an average of 29.4 percent for the past 10 sales.

The week’s sales raised $6.5 billion of new cash, as maturing securities held by the public total $63.5 billion, according to the U.S. Treasury.

To contact the reporter on this story: 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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