Treasury Investors Bypassing Dealers Spur Record Auction Demand

Investors bypassing the Federal Reserve’s network of primary dealers won record amounts of securities at the $109 billion in U.S. Treasury auctions this week, underscoring the appeal of the world’s safest securities.

The 22 primary dealers that include Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp. won the smallest percentage on record of the five- and seven-year notes sold the past two days. Bidding was also robust for the two-year fixed and floating-rate securities sold this week.

Demand from pension funds, mutual funds, foreign central banks and individual investors bidding directly is proving to be resilient even with the Federal Reserve signaling policy makers will begin to raise interest rates next year. Turmoil in Ukraine and questions of the strength of the global and U.S. recovery has investors seeking to buy the world’s mostly liquid assets.

“Demand has been very strong,” Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “There certainly has been an underlying positive tone to the Treasury market which has been driven by the geopolitical risk, and also growth in the emerging markets, and China for that matter.”

Direct bidders bought 25.4 percent of the two-, five- and seven-year notes at this month’s auctions, the second biggest share since the seven-year securities were reintroduced in 2009, according to Treasury data compiled by Bloomberg News.

The ratio of total bids to the amount of notes the government sold this week was 3.15, compared with 3.37 for the same set of maturities auctioned a month ago.

‘Buying Opportunity’

The backup in yields triggered last week by Fed Chair Janet Yellen’s comments that policy makers may raise rates six month after ending their bond-buying program likely prompted investors to increase bids at the auctions.

“The back-up in rates that we saw last week was seen to be a buying opportunity,” said Richard Gilhooly, an interest rate strategist in New York with TD Securities Inc., a primary dealer.

Yesterday’s sale of $29 billion in seven-year securities drew a yield of 2.258 percent, the highest since December. The $35 billion offering of five-year notes the prior day yielded 1.715 percent, and the March 25 auction of $32 billion of two-year debt yielded 0.469 percent, both the highest since May 2011. The Treasury sold $13 billion of two-year floating rate notes March 26 at a high discount margin of 0.069 percent, versus 0.064 percent a month earlier.

Non-Dealer Bids

Demand for the $186 billion of U.S. notes and bonds the Treasury auctioned this month was almost the strongest since October 2012. The government attracted 3.03 times the amount of bids as it had securities to sell, buoyed by offers for the government’s third issue of floating-rate notes. The ratio last month was 3.13, the most since October 2012.

The seven-year note’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.59, compared with the 2.56 average of the past 10 auctions.

Direct bidders, purchased 32.6 percent of the seven-year notes, the most on record going back to 2009 and topping the previous high of 24.6 percent at the last sale. Indirect bidders, a class of investor that includes foreign central banks, bought 41.4 percent of the seven-year offering, compared with 41.1 percent at the February sale.

That left primary dealers with 26 percent of the auction, the smallest on record, going back to the 2009 reintroduction of the seven-year security.

Floating-Rate Debt

Dealers were also awarded a record low 25.9 percent of the offering of five-year notes, according to Treasury auction data that goes back to 2003.

The government’s sale of two-year floating-rate notes, the third offering of the securities, had a bid-to-cover ratio of 4.67. The January auction was the first new Treasury security sold in 17 years.

The five-year note auction’s bid-to-cover ratio was 2.99, the highest since September 2012. The fixed-rate two-year note offering had a bid-to-cover ratio of 3.2, compared to an average of 3.3 percent at the past 10 sales.

U.S. government securities have gained 1.8 percent this year as turmoil in emerging markets from China to Argentina spurred demand for haven in January, followed by Russia’s move to occupy and annex the Crimea region of Ukraine, according to the Bloomberg U.S. Treasury Bond Index. (BUSY) Bonds have fallen 0.2 percent this month.

Given remaining concern that potential deflationary pressure will hurt growth in Europe and emerging markets, which will act as a drag on global growth, “you have a pretty positive backdrop for bonds,” Gilhooly said.

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

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

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