The U.S. Treasury’s five- and seven-year note auctions this week attracted the least demand in four years amid speculation a strengthening economy will prompt the Federal Reserve to reduce its bond-buying program.
The bid-to-cover ratio on yesterday’s seven-year note sale, which gauges demand by comparing total bids with the amount of securities offered, was 2.43, the least since May 2009 and versus an average of 2.65 for the past 10 sales. The five-year note sale on Aug. 28 drew a bid of $2.38 for every dollar sold in debt, the least since July 2009. The Aug. 27 sale of $34 billion of two-year notes, the shortest maturity U.S. coupon debt, attracted the most demand since April.
Desire to buy U.S. debt has waned as the Fed policy makers have signaled they are comfortable with reducing monetary stimulus if the economy continues to expand. Investors have bid $2.87 for each dollar of the $1.443 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.
“The story in rates is about the Fed taper,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “Economic numbers are doing better and you have seen aggregate demand for five- and seven-year auctions cool.”
This week’s sales will raise $38.1 billion of new cash, as maturing securities held by the public total $59.9 billion, according to the U.S. Treasury.
The seven-year note auction drew a yield of 2.221 percent, compared with a forecast of 2.232 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers.
Indirect bidders, an investor class that includes foreign central banks, purchased 40.8 percent of the notes, compared with an average of 39.9 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 22.4 percent of the notes at the sale, compared with an average of 19.1 percent for the past 10 auctions.
Securities maturing in seven or more years are “the most vulnerable points on the curve on a tapering move,” said Carlos Pro, an interest-rate strategist at Credit Suisse Group AG in New York, one of the Fed’s 21 primary dealers obligated to bid at U.S. debt sales. The weakness in the auction “reflects the market’s caution toward the intermediate sector of the curve.”
The sale of $35 billion in five-year notes yesterday turned into additional issuance of seven-year notes sold in 2011, the first so-called unscheduled reopening of a security since 2004.
With the five-year yielding 1.624 percent at the sale, the notes were assigned a 1.5 percent coupon, matching the interest payout on the seven-year security issued in August 2011 with the same 2018 maturity date. The debt will be classified as a five-year note, according to the Treasury Department.
The sale of two-year notes drew a yield of 0.386 percent. The size of the offering was the first cut in issuance since October 2010. The Treasury has sold $35 billion at the past 34 sales of two-year notes. The securities peaked at $44 billion from October 2009 through April 2010.
“Given the uncertainty in the market, the auctions were a mixed bag at best,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The bias in the market is to test higher yields.”