Treasuries Fall as Refuge Demand Eases While U.S. Auctions Debt

Treasuries declined, with 10-year yields climbing from a two-month low, as the U.S. sold $64 billion of notes, the first time it conducted two fixed-coupon debt auctions in a single day since October 2008.

U.S. debt losses were limited as the week-long slide in emerging-market assets boosted demand for the safest fixed-income securities. Today’s five- and seven-year auctions completed four note sales this week totaling $111 billion. Treasuries fell earlier after a report showed the economy expanded at a 3.2 percent annual rate in the fourth quarter. The Federal Reserve said yesterday it would further trim its monthly bond-buying amid optimism that economic growth is improving.

“The auctions went well” as the market took in “some flight-to-quality,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “The major concerns, especially in the longer end, are the data and the Fed.”

The yield on the 10-year note gained two basis points, or -0.02 percentage point, to 2.70 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. The 2.75 percent note due November 2023 slipped 5/32, or $1.56 per $1,000 face amount, to 100 15/32. The yield rose as much as five basis points and dropped seven basis points yesterday, and touched 2.66 percent, the least since Nov. 19.

The yield on the current seven-year note rose two basis points to 2.15 percent, while the yield on the current five-year note added one basis point to 1.51 percent.

Auction Demand

Investors have bid 3.05 times the $190 billion in notes and bonds sold by the Treasury in January, including the inaugural offering of $15 billion in two-year floating-rate notes. The demand was the highest since last January, when investors bid 3.11 times the amount of debt offered.

Investors bid 2.87 times the $2.14 trillion that the Treasury sold in notes and bonds last year. That total, which was down from a record 3.15 bid-to-cover ratio in 2012, was the fourth highest on record since the government began releasing data on auction bidding in 1994.

At the seven-year sale, the notes yielded 2.190 percent, compared with a forecast of 2.201 percent in a Bloomberg News poll of five of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.65, versus an average of 2.55 for the past 10 sales.

The sale of $35 billion of five-year notes yielded 1.572 percent at auction, compared with a forecast of 1.570 percent in a poll of six of the primary dealers.

Trading Pace

Treasury trading volume at ICAP, the largest interdealer broker of U.S. government debt, was $423.0 billion, down from $494 billion yesterday, the highest level since June 24.

The Fed said yesterday it will stick to its plan for a gradual withdrawal from departing Chairman Ben S. Bernanke’s unprecedented easing policy. It cut its monthly bond purchases to $65 billion from $75 billion.

It has undertaken three rounds of bond buying since 2008 under the quantitative-easing stimulus strategy, swelling its balance sheet to a record $4.1 trillion.

The Fed had been forecast to continue reducing purchases by $10 billion at the meeting yesterday and each one following to end the stimulus program this year, according to analysts in a Jan. 10 Bloomberg News survey.

Yield Forecast

U.S. 10-year yields will rise to 3.42 percent by the year-end, economists forecast. Investors who bought the securities today would lose about 3 percent during the period, according to data compiled by Bloomberg.

Treasuries fell earlier after the report showed the economy expanded in the fourth quarter, matching forecasts in a Bloomberg survey of economists before the Commerce Department released the figure today. Gross domestic product expanded 4.1 percent in the third quarter, the most in almost two years.

Pending sales of existing homes in the U.S. fell 8.7 percent in December, more than forecast, as higher borrowing costs and bad weather held back sales, the National Association of Realtors said in Washington. The decline was the biggest since May 2010, after a revised 0.3 percent drop in November that was initially reported as a gain. The median projection in a Bloomberg survey of economists called for the index to drop 0.3 percent.

Demand for Treasuries was supported amid a selloff of emerging-market currencies and as data signaled China’s manufacturing is decelerating.

China Economy

HSBC Holdings Plc and Markit Economics said their purchasing managers’ index for China was at 49.5 in January, compared with the previously reported 49.6 on Jan. 23 and 50.5 for December.

Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record. More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show.

“The fragility of those markets is such that there will be a lingering demand for Treasuries,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

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

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