Treasuries advanced, pushing 10-year note yields close to one-week lows, as concern U.S. lawmakers will fail to avert the so-called fiscal cliff spurred record demand at a $35 billion seven-year note auction.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased a record 19.7 percent of the notes, compared with an average of 14.4 percent at the past 10 auctions. The benchmark yield dropped as Federal Reserve Bank of New York President William C. Dudley indicated the possibility of additional asset purchases. Treasuries erased losses earlier after Republican House Speaker John Boehner said “no substantive progress” has been made in budget talks.
“It’s somewhat toxic because you’ve got two ends of the spectrum and it doesn’t look like we’re getting a middle ground,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “It’s a definite wait-and-see mode.”
The yield on the benchmark 10-year note fell one basis point, or 0.01 percentage point, to 1.62 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 gained 1/8, or $1.25 cents per $1,000 face amount, to 100 2/32.
The yield on the current seven-year note fell two basis points to 1.02 percent.
The seven-year securities drew a yield of 1.045 percent, compared with a forecast of 1.046 percent in a Bloomberg News survey of six of the Fed’s 21 primary dealers. The record auction low yield for the securities, 0.954 percent, was set at the July offering.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.81, the most since April and compared with the average of 2.74 for the previous 10 sales.
“The buy side is still clearly interested and we can easily take down supply, even at these levels,” said Thomas Simons, a government-debt economist at Jefferies Group Inc. In New York, a primary dealer obligated to bid at government debt auctions. “There’s been some chatter from New York Fed President Dudley talking about how if labor market conditions do not improve he would favor buying more Treasuries after Operation Twist expires.”
At today’s auction, indirect bidders, an investor class that includes foreign central banks, purchased 39.1 percent of the notes, compared with an average of 39.7 percent for the past 10 sales.
Seven-year notes have returned 4.4 percent this year, compared with a 2.7 percent gain by the broader Treasuries market, according to Bank of America Merrill Lynch indexes. The seven-year securities returned 13.7 percent in 2011, while Treasuries overall gained 9.8 percent.
The government sold $35 billion in five-year securities yesterday with direct bidders winning 15.9 percent of the offering, the most since 2004. The bid-to-cover ratio at the Nov. 27 auction of $35 billion in two-year debt of 4.07 matched the record for all Treasury coupon securities set a year ago at a two-year note offering.
Volatility in Treasuries rose yesterday from five year lows. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, increased to 52.3 basis points from 51.7 basis points the previous day, the lowest level since May 2007. It hit a 2012 high of 95.4 basis points on June 15. Volatility climbed to 264.6 basis points in October 2008 as the financial crisis intensified.
Treasury trading volume dropped today to $247.4 billion as of 5:01 p.m. in New York, from $281.5 billion yesterday, the most in three weeks, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The 2012 daily average is $240 billion
Treasury Secretary Timothy F. Geithner met the top four leaders in Congress today, after chief executives from more than a dozen U.S. corporations shuttled from the Capitol to the White House yesterday and pressed both sides for an agreement to prevent triggering automatic spending cuts and tax increases on Jan. 1.
The U.S. Treasury Department is estimated to have enough authority to continue borrowing through “at least mid-February” 2013, the Congressional Budget Office said in a report today.
The U.S. is approaching the $16.4 trillion debt ceiling and Congress must act to raise it. CBO’s estimate assumes that Treasury will use a series of “extraordinary” steps, as it has done in the past.
The Fed is acquiring as much as $17.2 billion in six Treasury purchases this week, including $4.74 billion today. The central bank is selling shorter-term Treasuries from its holdings and buying those due in six to 30 years under a program known as Operation Twist, which is scheduled to end next month.
The Fed’s Dudley said he is weighing “unacceptably high” joblessness as he considers whether the central bank should increase its asset purchases.
“I will be assessing the employment and inflation outlook in order to determine whether we should continue Treasury purchases into 2013,” Dudley said today in the text of remarks for a speech in New York. “The Fed will promote maximum employment and price stability to the greatest extent our tools permit, and we will stay the course.”
The policy-setting Federal Open Market Committee next meets on Dec. 11-12 to assess the impact of record accommodation, including a plan to buy $40 billion in mortgage bonds per month to reduce unemployment. The central bank said last month it will buy bonds until the job market improves “substantially.”
Gross domestic product grew at a 2.7 percent annual rate, up from a 2 percent prior estimate, revised figures from the Commerce Department showed today in Washington. The median forecast of 82 economists surveyed by Bloomberg called for a 2.8 percent gain. Household purchases climbed at a 1.4 percent rate, the least in more than a year and down from a previously reported 2 percent rate, and income gains were also cut.
Ten-year yields will end the year at 1.74 percent, according to Bloomberg surveys. They will climb to 1.85 percent in the first quarter of next year, the predictions show.