U.S. Note Sale Gets Above-Average Demand From Pensions, Insurers

Demand at the U.S. auction of $35 billion of five-year notes from a group that includes pension funds and insurers approached the highest level in almost a year amid speculation on the Federal Reserve’s agenda and turmoil in Ukraine.

The sale yesterday drew stronger-than-average demand from all bidders, with a bid-to-cover ratio, a gauge that compares the amount bid with the amount sold, of 2.79, versus an average of 2.62 at the past 10 offerings. Direct bidders bought 18.6 percent of the notes, compared with an average of 11.4 percent at the past 10 sales. Treasuries rose as tensions between Ukraine and Russia intensified. The Fed meets next week.

“There was big selling of five-year notes coming into the week, and the sector cheapened up to attractive levels, especially for direct bidders,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “With the uncertainty about the Fed -- where it’s going and how fast it’s going to get there -- hanging over the market, the five-year note should hover around these fair levels for now, with no huge upside or downside.”

The yield on the current five-year note fell one basis point, or 0.01 percentage point, to 1.72 percent at 5 p.m. yesterday in New York, according to Bloomberg Bond Trader prices. The benchmark 10-year (USGG10YR) note yield declined one basis point to 2.70 percent.

The auction drew a yield of 1.732 percent, the highest since May 2011, compared with a forecast of 1.723 percent in a Bloomberg News survey of seven of the Fed’s 22 primary dealers.

Bidder Participation

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased their second-biggest share of a five-year note offering since May, when they took 23.3 percent. They bought 23.1 percent of last month’s sale.

Indirect bidders, an investor class that includes foreign central banks, purchased 44.9 percent of the securities, compared with an average of 46 percent at the past 10 sales.

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.

‘Decent Auction’

“Five-year notes offered good value, and thus we had a decent auction,” said Gabriel Mann, a U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, which as a primary dealer is obligated to bid in U.S. debt sales. “We will have to wait for the FOMC statement, the next jobs report, for some direction. Until the market has an idea of where the economy is headed, there is little conviction and we are stuck in a range-bound market.”

The policy-setting Federal Open Market Committee meets April 29-30.

The Fed is in the process of reducing its third round of quantitative easing, in which it now buys $55 billion of bonds a month, down from $85 billion last year, to support the economy. It has kept its target interest rate for overnight bank lending in a range of zero to 0.25 percent since 2008.

Treasuries rose earlier as Russia vowed to defend its citizens in neighboring Ukraine after the government in Kiev vowed to oust militants from the country’s eastern cities.

‘Greatest Risks’

“Geopolitical risks are the greatest risks right now,” said Kevin Giddis, senior managing director and head of fixed income in Memphis at Raymond James & Associates Inc. “That’s evident in the auctions, and I think it will continue to be that way.”

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.

Yesterday’s auction was second of three offerings of U.S. coupon-bearing debt this week. The government sold $32 billion in two-year notes on April 22 at a yield of 0.447 percent, the second-highest since May 2011. It will offer $29 billion in seven-year securities today.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editors responsible for this story: Robert Burgess at bburgess@bloomberg.net Greg Storey, Paul Cox

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