Treasury five-year yields fell to almost the lowest since June after the U.S. sold $35 billion of the securities a day before the Federal Reserve is expected to announce it will continue its bond-buying program.
The notes sold at the auction drew a yield of 1.3 percent, the lowest at a sale of the security since May. Fed policy makers began a two-day meeting today at which they are forecast to maintain the central bank’s $85 billion in monthly debt purchases used to support the economy. Reports earlier showed wholesale prices unexpectedly fell in September, an indication inflation remains tame, retail sales declined and consumer confidence dropped to the lowest level since April.
“The market sentiment is still fairly positive on Treasuries, negative on the economy,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The data is going to have to prove more positive than the market thinks to create a change in sentiment. Most people think yields are headed lower.”
The yield on the current five-year note fell three basis points, or 0.03 percentage point, to 1.26 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. The 1.375 percent note due in September 2018 rose 3/32, or 94 cents per $1,000 face amount, to 100 17/32. Yields dropped to 1.25 percent on Oct. 23, the least since June 19.
The yield on the benchmark 10-year note declined two basis points to 2.5 percent. The price of the 2.5 percent note due in August 2023 rose 5/32, or $1.56 per $1,000 face amount, to 99 31/32.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was at $268.7 billion, below the 2013 average of $314 billion. Volume reached a 2013 high of $662 billion on May 22 and a low of $147.8 billion on Aug. 9.
Volatility in Treasuries as measured by the MOVE index rose to 58.81 after dropping yesterday to 58.54, the lowest level since May. It climbed on Sept. 5 to 114.2, the highest level in two months. It touched a record low 49 on May 9.
The auction yield compared with a forecast of 1.302 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.65 versus an average of 2.7 for the past 10 sales.
Indirect bidders, an investor class that includes foreign central banks, purchased 45.9 percent of the notes, the most since July, compared with an average of 44 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 12.2 percent of the notes at the sale, compared with an average of 15 percent for the past 10 auctions.
Primary dealers purchased 41.9 percent of the notes, the lowest since August.
“Most of the market are of the mind that the Fed is on hold until March or maybe even longer,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “This part of the curve had good buying with economic data being on the weak side. Any backup in yields will be met by buying.”
Five-year notes have lost 1 percent this year, versus a loss of 1.8 percent by Treasuries overall, according to Bank of America Merrill Lynch indexes. The five-year securities returned 2.3 percent in 2012, while Treasuries overall rose 2.2 percent.
Investors in Treasuries were short for the first time since Sept. 9, betting that the prices of the securities will drop, according to a survey by JPMorgan Chase & Co.
The proportion of net shorts rose to four percentage points in the week ending yesterday, according to JPMorgan. The percent of outright shorts, or bets the securities will fall in value, rose to 23 percent as of yesterday, from 15 percent the previous week. The percent of outright longs dropped to 19 percent, from 23 percent. Investors cut neutral bets to 58 percent, the lowest level since June 3, from 62 percent the previous week.
Today’s offering is the second of three note auctions this week totaling $96 billion. The government sold $32 billion in two-year debt yesterday at a yield of 0.323 percent, and will sell $29 billion in seven-year securities tomorrow.
“There is decent demand for the sector, with expectations for rates to stay low,” Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, which as a primary dealer is required to bid at Treasury auctions, said before today’s auction. “The Fed is going to be on hold for longer than people expected two months ago, providing demand for Treasuries even at these levels.”
Investors bid $2.87 for each dollar of the $1.756 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 Conference Board’s index of consumer confidence fell to 71.2 in October from 80.2 the month prior, the New York-based private research group said. The figure is the lowest since it touched 69 in April. The median forecast in a Bloomberg survey of economists called for a reading of 75.
The 0.1 percent decrease in the producer price index followed a 0.3 percent gain the prior month, a Labor Department report showed. The median estimate in a Bloomberg survey of 80 economists called for a 0.2 percent advance. The so-called core measure, which strips out volatile food and fuel, increased 0.1 percent after being unchanged in August.
Retail sales dropped 0.1 percent, Commerce Department figures showed, restrained by the biggest decrease at auto dealers since October 2012, as purchases early in the month were included in the August data.
The partial government shutdown that began Oct. 1 probably trimmed 0.25 percentage point from fourth-quarter economic growth and cost the U.S. 120,000 jobs in October, President Barack Obama’s chief economic adviser said on Oct. 22.
The Fed will delay slowing its monthly bond buying under the quantitative-easing stimulus strategy until March, according to economists surveyed by Bloomberg on Oct. 17-18.