Treasury Five-Year Securities Fall After $36 Billion Auction

Treasury five-year notes dropped as the government sold $36 billion of the securities in the third of four note and bond sales this week totaling $109 billion.

The offering drew a yield of 1.374 percent, compared with the average forecast of 1.363 percent in a Bloomberg News survey of 6 of the Federal Reserve’s 18 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with total securities offered, was 2.83, compared with an average of 2.72 for the previous 10 sales. Treasuries rose earlier as new home sales fell to a record low in July and orders for durable goods increased less than analysts forecast.

“These yield levels are not where there is a lot of demand in this marketplace,” said Thomas Tucci, head of U.S. government bond trading at Royal Bank of Canada in New York, before the auction. “Real investors aren’t investing at these levels.”

The yield on the current five-year note gained 2 basis points, or 0.02 percentage point, to 1.34 percent at 1:04 p.m. in New York, according to BGCantor Market Data.

Today’s auction is the smallest five-year note offering since May 2009. The $37 billion sale on July 28 drew a yield of 1.796 percent.

Indirect bidders, an investor class that includes foreign central banks, purchased 50.8 percent of the notes today, compared with 47.3 percent at the July auction and an average of 46.4 percent for the past 10 sales. Direct bidders purchased 8.7 percent at the auction, compared with 11.4 percent last month and an average of 10.1 percent for the past 10 sales.

Note Returns

Five-year notes have returned 9 percent this year through yesterday, compared with an 8.6 percent gain for the broader Treasury market, according to Bank of America Merrill Lynch indexes.

At yesterday’s $37 billion two-year Treasury note auction, the securities drew a record low yield of 0.498 percent. The sale’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.12, compared with an average of 3.19 at the past 10 auctions.

The $7 billion sale this week of 30-year Treasury Inflation Protected Securities, or TIPS, drew a yield of 1.768 percent, the lowest ever for sales of the debt dating to 1998. The bond auction’s bid-to-cover ratio was a record high 2.78.

The government will auction $29 billion in seven-year debt tomorrow. Altogether, the $102 billion of notes being sold this week is the smallest total for this combination of securities since May 2009.

Durable Goods

Orders for durable goods advanced a less-than-expected 0.3 percent in July after a revised 0.1 percent drop in the previous month, the Commerce Department reported. The median forecast in a Bloomberg News survey of 75 economists was for a 3 percent increase.

The department also said that sales of new homes unexpectedly dropped 12 percent last month to a record low 276,000 annual rate after a revised gain of 12 percent in June. The median forecast of 74 economists was for little change.

The National Association of Realtors reported yesterday that sales of existing homes tumbled a record 27 percent last month after a revised 7.1 percent reduction in June.

“These are recessing indicators, and they are quite bothersome,” Kevin Giddis, head of fixed-income sales, trading and research in Memphis, Tennessee, at the brokerage firm Morgan Keegan Inc., wrote in a note to clients today. “Slow growth may be a ‘goal’ not a foregone conclusion.”

Fed Bond Buying

In an attempt to bolster the economy, Federal Reserve policy makers said on Aug. 10 that the central bank would maintain its holdings of securities at $2.05 trillion to prevent money from draining out of the financial system.

The Fed will purchase about $18 billion of U.S. debt by the middle of September using the money from principal payments on its holdings of agency debt and agency mortgage-backed securities. The central bank bought $1.35 billion of Treasuries yesterday, increasing the total to $7.51 billion since the program began Aug. 17. Fed Chairman Ben S. Bernanke will discuss the outlook for the economy on Aug. 27 at a conference in Jackson Hole, Wyoming.

“Without a turnaround in the labor market we are only going to see more pain in the housing sector,” David Semmens, an economist at Standard Chartered Bank in New York, wrote in a note to clients.

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