The Treasury’s auctions of $95 billion of coupon-bearing notes this week drew the most bids since February even as a surge in global demand for government debt drove yields to the lowest levels in a year.
The bid-to-cover ratio, which gauges demand by comparing the amount of bids with the amount of debt, at the three sales exceeded averages for the previous 10 offerings. The worldwide bond rally pushed the yield on the Bloomberg Global Developed Sovereign Bond Index yesterday to 1.28 percent, the lowest since May 2013.
“There’s good buying in secondary markets, and that buying is translating into solid auctions for the Treasury,” said Michael Pond, head of global inflation-linked research at Barclays Plc, one of 22 primary dealers that are obligated to bid in U.S. debt sales. “It seems to be buying done on a basis relative to other fixed-income markets around the world. The market is out of line with U.S. fundamentals.”
Investors bid 2.95 times the $95 billion of two-, five- and seven-year notes sold by the government this week, versus 2.92 times the $96 billion of the securities offered in April and 2.94 times in March. The Treasury reduced the size of its two-year note sale by $1 billion to $31 billion this month.
Global bond markets rallied this week on growing evidence central banks can keep stimulating economic growth without igniting inflation.
A report yesterday showing an unexpected jump in German unemployment added to bets the European Central Bank will introduce further stimulus at its meeting next week. The U.S. economy contracted 1 percent in the first quarter, the Commerce Department reported today.
The benchmark U.S. 10-year yield dropped as much as four basis points today, or 0.04 percentage point, to 2.40 percent, the lowest since June 21, before rising two basis points to 2.47 percent at 5 p.m. New York time, Bloomberg Bond Trader data showed. The yield fell seven basis points yesterday. The price of the 2.5 percent security due in May 2024 ended the day down 6/32, or $1.88 per $1,000 face amount, to 100 10/32.
The amount of Treasuries traded through Icap Plc, the largest inter-dealer broker of U.S. government debt, fell for the first time in three days. It declined 7.6 percent to $382 billion. The daily average this year is $338 billion, and the high was $606 billion on May 2.
This week’s U.S. note sales drew the lowest yields in at least three months. The $29 billion in seven-year debt sold today yielded 2.01 percent, the least since October. Yesterday’s offering of $35 billion in five-year notes drew 1.513 percent, the lowest since November, and May 27’s two-year sale yielded 0.392 percent, the least since February.
“It’s a good, old-fashioned squeeze” as investors who bet on lower prices for Treasuries have been forced to buy them as the debt rallied, said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “We are pretty close to the bottom in yields for the year.”
The seven-year auction’s bid-to-cover ratio was 2.60, versus an average of 2.55 at the past 10 auctions.
Indirect bidders, an investor class that includes foreign central banks, purchased 40.4 percent of the notes, compared with an average of 43 percent for the past 10 sales. Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 24.1 percent, versus an average of 21 percent at the last 10 seven-year debt auctions.
The five-year sale’s bid-to-cover ratio was 2.73, compared with an average at the past 10 offerings was 2.65.
The coverage ratio at the auction of two-year notes was 3.52, versus a 10-sale average of 3.35.
The U.S. also sold $13 billion of two-year floating-rate notes yesterday to the strongest demand since the February offering of the debt as investors sought an alternative money-market security. The bid-to-cover ratio was 4.69, compared with 4.64 at the March sale. The high discount margin was 0.063 percent, the lowest since the Treasury first sold the securities in January.
Evidence that weakening labor markets will constrain demand and inflation has caused investors to pour into government bonds. That’s confounded economist predictions for a second year of losses as signs earlier this year that U.S. economic growth is gaining traction prompted the Federal Reserve to taper its $85 billion-a-month bond-buying program.
Euro-area government bonds have advanced since ECB President Mario Draghi said on May 8 the Governing Council was “comfortable” taking measures to boost inflation in the region. Consumer-price increases in the 18-nation currency bloc have been less than half the central bank’s goal of below 2 percent since October. The ECB meets on June 5.
“You have a dynamic today that is at play that I’d say is truly extraordinary, and I’d argue is truly historic, where Draghi and ECB are going to be incredibly aggressive going forward,” BlackRock Inc.’s chief investment officer, Rick Rieder, said in a television interview on “Bloomberg Surveillance” with Tom Keene. “U.S. Treasuries don’t look that bad, relative to the rest of the world.”
The Fed’s preferred gauge of inflation, an index of personal consumption expenditures, has remained below its 2 percent target for almost two years. The measure increased 1.1 percent in March, the latest figure available, from a year earlier.
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