Treasury Bonds Fall as Auction Demand Drops to 3-Year Low

Treasury bonds fell, erasing an earlier rally, after the lowest yields in more than 10 months reduced demand at the government’s $16 billion auction of the longest-maturity debt to the least in almost three years.

The bonds were sold at a yield of 3.440 percent, versus a forecast of 3.392 percent in a Bloomberg News survey of nine of the Federal Reserve’s 22 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.09, the lowest since August 2011. The long bond has returned 12 percent this year, the most for that period in data compiled by Bank of America going back to 1988, and the best performance among U.S. debt.

“The yield levels were very unappealing,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, which as a primary dealer is obligated to bid in U.S. debt auctions. “It’s become a victim of its own success.”

The yield on the current 30-year bond increased three basis points, or 0.03 percentage point, to 3.43 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 3.625 percent security due in February 2044 dropped 19/32, or $5.94 per $1,000 face amount, to 103 17/32. The yield fell earlier as much as three basis points to 3.37 percent. It sank to 3.35 percent on May 5, the lowest level since June 19.

Notes Rise

Shorter-term Treasuries gained, bolstered by Fed Chair Janet Yellen’s comments that interest rates are unlikely to rise unless the economic recovery is stronger, and the European Central Bank suggesting that it may cut rates next month.

Five-year note yields decreased three basis points to 1.63 percent, and two-year notes fell one basis point to 0.39 percent. Benchmark 10-year note yields yielded 2.62 percent.

The yield curve, the gap in yields between five- and 30-year debt, widened to 181 basis points. It contracted to 168 basis points on May 2, the flattest since 2009.

Primary dealers, the banks and investment firms that underwrite U.S. debt, took 51.2 percent of the bonds at today’s auction, the most since June, as other bidders bought lower-than-average amounts.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 8.4 percent of the bonds, the least since March 2013. Their average share at the past 10 offerings was 16.9 percent.

Indirect bidders, an investor class that includes foreign central banks, purchased 40.4 percent, compared with an average of 41.3 percent for the past 10 sales.

“Demand has been so persistent in the long-bond sector that it isn’t a big surprise that we needed to have some concession to take the auction down, given where we are in yield,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Coupon Sales

Demand for the $69 billion of three-, 10- and 30-year debt sold this week by the Treasury was the smallest for the series of maturities since October, according to data compiled by Bloomberg. The ratio of bids to debt sold was 2.83 times, compared with 2.99 times for the three sales of the securities a month ago.

Investors have bid 3.05 times the $826 billion of notes and bonds sold by the U.S. this year, up from 2.87 times last year, which was down from a record 3.15 times in 2012, according to Treasury data compiled by Bloomberg.

Today’s auction was the final of three note and bond offerings this week. The U.S. sold $29 billion of three-year debt on May 6 at a yield of 0.928 percent and auctioned $24 billion of 10-year debt yesterday at a yield of 2.612 percent.

Potential Shortage

Long-bond buyers are facing a potential shortage of supply. Excluding those held by the Fed, Treasuries due in 10 years or more account for just 5 percent of the $12.1 trillion market for U.S. debt.

Longer-term securities may get about $300 billion in extra demand from pension funds over the next two years that would equal almost half the $642 billion of the debt outstanding, according to data from Bank of Nova Scotia, a primary dealer.

The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, rose 1.1 percent in March from a year ago, a report on May 1 showed. The gauge has fallen short of the bank’s 2 percent target for almost two years.

Yellen testified to the Senate Budget Committee, reiterating that while solid second-quarter economic growth bolsters the case for the tapering of central-bank bond purchases, inflation remains low. She said U.S. economic data show “solid growth” in the second quarter. Still, she said, “many Americans who want a job are still unemployed” and inflation is low.

After keeping euro-area interest rates at record lows today, ECB President Mario Draghi told reporters that the 24-member Governing Council is “comfortable with acting next time.” Rates cuts in Europe increased the attractiveness of U.S. securities to international investors.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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

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