Buyers of 10-year notes at the Treasury’s $21 billion auction of the debt turned a quick profit as concern Federal Reserve policy makers are moving closer to accelerating interest-rate increases proved unfounded.
U.S. government debt fell before yesterday’s sale amid bets minutes from last month’s policy meeting would would reveal discussion of exit plans. The securities erased losses an hour later as the minutes showed some policy makers were concerned investors may be too complacent and said the central bank should be on the lookout for excessive risk-taking.
“Everyone was expecting a more hawkish Fed -- the market has a tendency of getting ahead of itself -- and the Fed minutes threw some cold water on that,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, which is obliged to bid in U.S. debt sales as one of Fed’s primary dealers. “Investors who bought at the auction did well, and everyone else, who expected to buy at higher yields after hearing the Fed minutes, is being forced to chase the rally.”
Ten-year notes sold at the auction yielded 2.597 percent. The yield on benchmark 10-year note rose as much as four basis points, or 0.04 percentage point, to 2.60 percent after the sale before dropping to as low as 2.54 percent after the minutes were released. They traded little changed at 2.55 percent at 5 p.m. yesterday in New York.
The 22 primary dealers, the banks and investment firms that underwrite U.S. debt, were left with the largest share of a 10-year note auction in more than a year amid dwindling demand from investors that include pension funds and foreign central banks.
The lowest auction yield since June 2013 damped investor appetite, leaving primary dealers with 46.5 percent of the notes, the most since May 2013. A Bloomberg News survey of nine primary dealers a forecast a yield of 2.585 percent.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.57, the weakest since February, compared with an average of 2.72 for the previous 10 sales.
“The yield at the auction was relatively low, the uncertainty ahead of the Fed minutes was there, and it made for a disappointing auction that left the dealers holding the bag,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “There was more hawkishness expected from the Fed minutes, and that’s not what we got.”
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 13.9 percent of the notes, the smallest share since January. That compared with an average of 19.4 percent at the past 10 sales of the maturity.
“The auction was weak in general,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “Direct bidders were more cautious ahead of the uncertainty of the Fed minutes and the better data we’ve seen of late.”
Indirect bidders, an investor class that includes foreign central banks, purchased 39.6 percent of the securities, compared with an average of 44.2 percent at the past 10 sales.
Ten-year notes have returned 5.7 percent this year, compared with a 2.9 percent gain in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes. The benchmark notes lost 7.8 percent in 2013, versus a 3.4 percent decline by Treasuries overall.
Traders see a 79 percent chance the Fed will raise its benchmark interest-rate target by September 2015, compared with about 50 percent at the end of May, fed-fund futures contracts show. The central bank has kept its target for the benchmark fed funds rate in a range of zero to 0.25 percent since December 2008 to support the economy.
“The Fed hasn’t been shaken by stronger inflation and employment data,” said BNP’s Kohli. “It set’s a tone of caution and balance, and the market was forced to capitulate.”