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Treasury Auction Demand Rises to Highest Level in More Than Year

Demand surged to the highest level since March 2013 for the $62 billion in Treasury notes and bonds sold this week as the U.S. economy showed signs of slowing and investors sought refuge from turmoil in Iraq.

Led by record demand at yesterday’s 30-year bond auction by non-primary dealers, the securities received bids equal to 3.08 times the debt sold, according to Treasury data compiled by Bloomberg. What’s known as the bid-to-cover ratio for the same mix of three, 10- and 30-year securities sold in May had dropped to the least in seven months.

“A general nervousness persists about the longer term-growth picture and lack of inflation, which makes longer-term yields attractive,” said Dan Greenhaus, chief global strategist in New York at BTIG LLC. “When you introduce the developments in the Middle East to the picture, you have a strong backdrop for Treasuries.”

This year’s rally in Treasuries is confounding forecasters who foresaw declines as a strengthening U.S. employment market prompted the Federal Reserve to cut back its own bond buying.

The bid-to-cover ration at the $13 billion sale of 30-year bonds was the strongest since February 2013 at 2.69. The long bond has returned 10.8 percent this year, the most for that period in data compiled by Bank of America since 1995.

Investor classes that include foreign central banks, pension funds and insurers purchased their largest share of the 30-year bond auction on record, leaving dealers with 26.5 percent, the smallest share since the Treasury began releasing bidder participation data in 2003.

Inflation Gauge

The yield on the 30-year bond fell six basis points, or 0.06 percentage point, to 3.41 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It’s the biggest drop since May 28. Benchmark 10-year note yields declined four basis points to 2.59 percent.

The bond sale followed auctions of $28 billion of three-year notes on June 10 at a yield of 0.93 percent and $21 billion of 10-year securities the day after at 2.648 percent.

Demand has risen with inflation subdued. The Fed’s preferred inflation gauge remained below the central bank’s 2 percent goal for a 24th straight month in April, Commerce Department data showed. The personal consumption expenditures deflator rose 1.6 percent from a year earlier, the most since November 2012.

“There is still a general need for duration in the market and because of the Fed, there is less supply,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of 22 primary dealers that bid at Treasury auctions. “Combined with the Iraq headlines and the bump in oil prices, there is enough nervousness to support the market after its recent floundering”

Annual Demand

A surge in violence across northern and central Iraq, three years after U.S. troops withdrew, has raised the prospect of a return to sectarian civil war in OPEC’s second-biggest oil producer. Data yesterday showed retail sales increased less than forecast, rising 0.3 percent last month, falling short of the median estimate of economists surveyed by Bloomberg that projected a 0.6 percent advance, Commerce Department figures showed yesterday.

The 10-year note auction’s bid-to-cover ratio was 2.88, while the three-year note sale had a coverage ratio of 3.41.

Investors have bid 3.06 times the $1.009 trillion in notes and bonds sold by the Treasury so far this year. That compares with 2.87 times last year and a record 3.15 times in 2012 when the Treasury sold $2.153 trillion of notes and bonds.

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