Treasuries gained after the government’s $29 billion auction of seven-year notes produced the highest demand from a group of investors including foreign central banks since June 2009.
The yield on the benchmark 10-year security dropped the most since the Labor Department’s payrolls report on June 4 as the last U.S. note sale of 2010 spurred buying. Treasuries tumbled yesterday after the $35 billion five-year auction attracted the lowest demand in six months.
“It was a decently strong above-average auction,” said Joseph Leary, an interest-rate strategist in New York at Citigroup Inc., one of the 18 primary dealers obligated to participate in U.S. debt sales. “Foreigners and investment funds showed up as they are trying to move out the curve to pick up yield.”
The yield on the current seven-year note fell 15 basis points, or 0.15 percentage point, to 2.72 percent at 5:17 p.m. in New York, according to BGCantor Market Data. The price of the 2.25 percent security maturing in November 2017 rose 30/32, or $9.38 per $1,000 face amount, to 97 2/32.
The 10-year note yield dropped as much as 16 basis points to 3.32 percent in the biggest decrease since June 4, when the U.S. payrolls report showed employers added fewer jobs in May than economists forecast.
Year-end rebalancing of portfolios buoyed U.S. debt today. The duration of Barclays Plc’s U.S. Treasury Index will rise by 0.9 years this month, matching the historical high for any December, according to a report from the primary dealer released after yesterday’s close. Duration measures price sensitivity to changes in yield and is partly a function of maturity.
“We are seeing some window dressing of balance sheets going into year-end, which should bode well for Treasuries the rest of the year,” said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies Group Inc., another primary dealer.
U.S. debt has returned 4.9 percent in 2010, more than erasing last year’s 3.7 percent loss, according to a Bank of America Merrill Lynch index. Investment-grade corporate debt has returned 8.2 percent, while the Standard & Poor’s 500 Index has increased 13 percent.
At today’s offering of the December 2017 maturity, indirect bidders, including foreign central banks, purchased 64.2 percent of the notes, the highest level since June 2009. Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 4.6 percent of the notes, compared with 8.5 percent last month and the 10-sale average of 10.4 percent.
The seven-year notes drew a yield of 2.830 percent, compared with the average forecast of 2.864 percent in a Bloomberg News survey of 6 of the 18 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.86, compared with 2.63 at the Nov. 24 sale.
The 10-year note yield rose 15 basis points yesterday, the most in two weeks, following the five-year note sale. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.61, the least since June. Primary dealers ended up buying 58.2 percent of the offering, the most since July 2009.
Treasuries advanced on Dec. 27, when the $35 billion sale of two-year notes drew the highest level of demand in three months. The government auctioned $99 billion in notes this week.
“The seven-year auction was a very important event for market direction into year-end,” Nomura Holdings Inc. analysts including George Goncalves in New York wrote in a research note today. The firm is a primary dealer. “Dealer balance sheets were already strained by the two-year and five-year auctions, but indirects stepped up, and that made for a stellar auction.”
U.S. government debt maturing in more than a year has handed investors a loss of 2.7 percent in December, according to figures compiled by Bloomberg and the European Federation of Financial Analysts Societies. That’s the worst monthly performance among 26 sovereign indexes.
Bond bears speculate that U.S. economic growth will pick up in 2011, driven by the Federal Reserve’s second round of government debt purchases known as quantitative easing, an extension of tax cuts that President Barack Obama signed into law this month and a widening of deficits.
Gross domestic product will expand at a pace of 3 to 3.5 percent in 2011, Dean Maki, chief U.S. economist at Barclays in New York, said yesterday in an interview with Pimm Fox on Bloomberg Television’s “Bottom Line” program. The rate of expansion was 2.6 percent in the third quarter.
“Growth in general will be fairly robust,” said Maki, whose firm is a primary dealer. “We are favorable on the U.S. stock market.”
The Fed bought $5.387 billion of Treasuries maturing from June 2012 to June 2013 in the last scheduled operation of the year under the asset-purchase program.