Treasury 5-Year Auction Draws Increase in Indirect Bids

The Treasury’s $35 billion five-year note sale drew the strongest demand in 13 months from a class of bidders that includes foreign central banks as the plunge in European yields prompted investors to buy U.S. debt.

Indirect bidders bought 52.7 percent of the notes yesterday, the most since July 2013, compared with an average of 46.4 percent for the past 10 offerings, Treasury data compiled by Bloomberg show. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.81, versus an average of 2.73 for the past 10 sales.

“There is demand for paper out there with European yields coming down as much as they have,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “We also have the lower Fed funds rate from the Fed and the ECB possibly stepping up their accommodation and that continues to have a depressing effect on global yields.”

The notes were sold at a yield of 1.646 percent, compared with a forecast of 1.645 percent in a Bloomberg News survey of six of the Federal Reserve’s 22 primary dealers

The existing U.S. five-year note yielded 146 basis points, or 1.46 percentage points, more than their German equivalent prior to yesterday’s auction. The yield premium reached 148 basis points on Aug. 25, the most since November 2005.

Investor Flows

Higher relative U.S. yields to their European counterparts come as Federal Reserve Chair Janet Yellen said last week the U.S. labor market has made “considerable progress” at a time when European Central Bank President Mario Draghi has moved closer to quantitative easing and Bank of Japan policy makers keep pumping cash into the financial system to counter deflation.

“As Europe moves to lower yields, money is moving into the U.S. Treasury market to take advantage of the bigger spread between the two,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of the primary dealers obligated to bid at Treasury auctions. “It was a fantastic auction.”

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 10.8 percent of the notes, versus an average of 14.2 percent for the past 10 auctions.

Five-year notes have returned 1.97 percent this year, versus a gain of 3.97 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.

The offering was the third of four auctions of coupon-bearing debt this week. The government sold $13 billion in two-year floating-rate notes earlier yesterday and sold $29 billion in two-year notes the day before at a yield of 0.53 percent. It will offer $29 billion in seven-year notes today.

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

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

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