Benchmark 10-year notes gained as the government in Kiev vowed to oust militants from its eastern regions. Intermediate-term U.S. government debt rallied even as the U.S. sold $35 billion of five-year notes, attracting stronger-than-average demand. New-home sales unexpectedly fell in March, raising speculation the economy may not experience a rapid growth surge amid warmer weather and as prices for longer-term debt have already risen.
“Weaker home sales was the catalyst driving today’s activity,” said Kevin Giddis, senior managing director and head of fixed income in Memphis, Tennessee at Raymond James & Associates Inc. “What is being created is mostly long-end buying interest on what people think the economy in the U.S. is going to do, and the potential for any geopolitical risk.”
The yield on the current five-year note fell one basis point, or 0.01 percentage point, to 1.73 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. The yield on the benchmark 10-year note declined one basis point to 2.70 percent.
The five-year securities yielded 1.732 percent at the auction, the highest since May 2011, and compared with a forecast of 1.723 percent in a Bloomberg News survey of seven of the Federal Reserve’s primary dealers.
The bid-to-cover ratio, which measures the amount of demand at the auction relative to the size of the offering, was 2.79 times compared with an average of 2.62 at the 10 previous sales.
“The selloff in the intermediate sector may have run its course,” said William O’Donnell, head U.S. government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 22 primary dealers that are obligated to bid at the auctions. “That’s a real positive for today’s auction and tomorrow’s. It’s attractive enough to finally go back into that sector.”
The Treasury is scheduled to sell $29 billion of seven-year notes tomorrow. The government auctioned $32 billion in two-year debt yesterday at a yield of 0.447 percent, the second highest since May 2011.
Indirect bidders for the five-year debt, an investor class that includes foreign central banks, purchased 44.9 percent of the notes, compared with an average of 46 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 18.6 percent of the notes at the sale, compared with an average of 11.4 percent for the past 10 auctions.
Investors have bid 3.05 times the $713 billion of notes and bonds sold by the Treasury this year, compared with 2.87 times last year and 3.15 times in 2012, the record high, according to Treasury data compiled by Bloomberg.
Five-year notes have returned 0.8 percent this year, versus a gain of 1.9 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The five-year securities lost 2.4 percent in 2013, while Treasuries overall fell 3.4 percent.
Recent confusion about how to interpret Fed policy is “where the market really struggles,” said Sean Murphy, a trader at Societe Generale SA in New York, a primary dealer. “It’s been a bit of a battle” between market views with dovish comments from Fed Chair Janet Yellen conflicting with policy makers “showing no signs of slowing down tapering.”
The central bank is in the process of scaling back the bond-purchase program it has used to help support the economy. It has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008. The central bank’s next policy meeting is April 29-30.
Yellen signaled after the March 19 meeting that the central bank may increase borrowing costs in the middle of next year, while this month she emphasized her commitment to support the recovery.
The 10-year Treasury yield has declined this year since reaching a two-year high of 3.05 percent in January. The yield difference between 30-year bonds and five-year notes shrank to 1.75 percentage points, the narrowest since 2009.
New home sales dropped 14.5 percent to a 384,000 annualized pace, lower than any forecast of economists surveyed by Bloomberg and the weakest since July, Commerce Department data showed. The median forecast of 74 economists surveyed by Bloomberg News called for the pace to accelerate to 450,000.
Treasuries were supported as security agencies are seeking to eliminate all militias operating in Kramatorsk, Slovyansk and other cities, Ukraine’s First Deputy Prime Minister Vitali Yarema told reporters in Kiev today.
With international efforts to defuse the crisis grinding to a halt, the U.S. said it will send 600 troops for exercises in four countries bordering Russia, days after NATO bolstered the defense of front-line member states in eastern Europe.