Treasury Bond Auction Demand Rises Amid Low Inflation Outlook

The U.S. sale of $13 billion of bonds drew higher-than-average demand as investors favored the security over three- and 10-year debt this week amid yields at almost the highest in 2 1/2 years and low inflation.

The Treasury sold the 30-year securities yesterday at a bid-to-cover ratio of 2.57, compared with 2.38 at the previous 10 sales. The ratio gauges demand by comparing total bids with the amount offered. The auction followed a $21 billion sale of 10-year notes Jan. 8 with demand of 2.68, below the average of 2.7 at the past 10 offerings, and a three-year $30 billion auction the previous day with demand of 3.25, the lowest since October.

“People are looking at an improvement in the economy as a reason to be nervous about longs in the front end of the curve,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. A long is a bet an asset will appreciate in value. “An improving economy could move forward rate hikes. Inflation is low for the foreseeable future. There was a need for the bond because people had been underweight the long end of the curve.”

The current 30-year bond yield fell one basis point, or 0.01 percentage point, to 3.88 percent at 5 p.m. yesterday in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in November 2043 gained 7/32, or $2.19 per $1,000 face amount, to 97 23/32. The yield reached 3.97 percent on Jan. 2, the highest since August 2011

The benchmark 10-year yield fell two basis points to 2.97 percent.

The Fed’s preferred inflation measure, the personal consumption expenditures index, showed prices rose 0.9 percent in the 12 months ended in November, the Commerce Department said Dec. 23. The gauge hasn’t been above 2 percent since April 2012.

Higher Yields

The yield at the 30-year bond sale was 3.899 percent, lower than the forecast of 3.914 percent in a Bloomberg News survey of 10 of 21 primary dealers. The yield was close to the 3.9 percent level at last month’s auction of the security, the highest since July 2011.

The 10- and three-year auctions this week drew higher-than-forecast yields. The 10-year auction drew a yield of 3.009 percent, the highest since the Treasury sold $24 billion of the securities at 3.210 percent in May 2011. The forecast was for a yield of 3.004 percent, according to the average estimate in a Bloomberg News survey of seven of the Fed’s primary dealers.

The three-year note auction on Jan.7 drew a yield of at 0.799 percent, the highest since September, compared with the average forecast of 0.797 percent in a Bloomberg News survey of six of the Fed’s primary dealers. That compared with 0.631 percent in December at the previous offering of the security.

Fed Tapering

Fed policy makers saw diminishing economic benefits from the central bank’s bond-buying program and expressed concern about risks to financial stability when they took the first step to cut the pace of purchases, according to minutes of their last meeting released Jan. 8.

“A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue,” the record of the Federal Open Market Committee’s Dec. 17-18 meeting showed.

The minutes didn’t describe a set schedule for the pace of asset-purchase reductions, while “a few” officials mentioned the need for a “more deterministic path.’

The Labor Department will report today that employers added 197,000 workers in December, versus 203,000 the previous month, the median estimate of economists surveyed by Bloomberg shows. The unemployment rate will remain at 7 percent, based on the responses.

Foreign Bid

Indirect bidders, an investor group that includes foreign central banks, purchased 44.4 percent of the securities at the 30-year bond sale, compared with 46 percent in December, the most since April 2011. The average at the past 10 offerings was 39.4 percent.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 17.5 percent, compared with 12.5 percent at the previous sale. The average for the past 10 auctions is 15.6 percent.

Indirect bidders, bought 46.6 percent of the notes at the 10-year sale, compared with 48.9 percent at last month’s sale. Direct bidders bought 13.6 percent compared with 10.6 percent last month, which was the least since August 2012.

This week’s sales raised $4.8 billion of new cash, as maturing debt held by the public totaled $59.2 billion, according to the U.S. Treasury.

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