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Treasury Auction Demand by Non-Dealers Highest Since March

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Aug. 29 (Bloomberg) -- The Treasury’s $29 billion seven-year note auction received the most demand from non-primary dealers since March as investors sought refuge from geopolitical turmoil and higher returns than those offered by European debt.

Indirect bidders, an investor class that includes foreign central banks, purchased 48.8 percent of the notes yesterday, while direct bidders, a category that includes pension funds and insurers, bought 20.4 percent. That reduced the amount won by the 22 primary dealers that trade with the Federal Reserve and are obligated to bid at auctions to 30.7 percent, Treasury data compiled by Bloomberg show.

The seven-year notes were sold at a yield of 2.045 percent, matching the average forecast in a survey by Bloomberg News of six primary dealers. The so-called high yield was the least since May. The sale’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.57, matching the average at the past 10 auctions.

“There is demand for Treasuries, and there aren’t many people out there fighting the move,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors. “The geopolitical concerns, plus lower yields in Europe continue to weigh on everything.”

The yield on the current seven-year note maturing in July 2021 declined two basis points yesterday to 2.02 percent and touched 2 percent, the lowest since Aug. 19, according to Bloomberg Bond Trader Prices.

Global Bonds

Bank of America Merrill Lynch’s Global Broad Market Sovereign Plus Index rose to within half a percent of its all-time high yesterday based on prices, according to data starting in 1996, on speculation the European Central Bank is preparing further action to spur a slumping economy. Ukraine said actions by Russia amount to an invasion. Treasuries rallied even as data showed the U.S. economy grew more than initially estimated in the second quarter.

“You look at these low yield levels and they look crazy until you look everywhere else, and suddenly U.S. yields don’t look that crazy anymore,” Stanley Sun, a New York-based strategist at Nomura Holdings Inc., a primary dealer, said in a telephone interview. “As long as European yields keep going lower and European data and news continues to outweigh U.S. data, these low yields don’t look like they are going to change anytime soon.”

Seven-year notes have returned 4.7 percent this year, versus a 4.2 percent gain by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The seven-year securities lost 4.8 percent in 2013, while Treasuries overall fell 3.4 percent.

The Treasury sold $35 billion in five-year notes the day earlier at a yield of 1.64 percent and $29 billion in two-year notes on Aug. 26 at a yield of 0.53 percent. The U.S. also sold $13 billion in two- year floating-rate notes this week.

The five-year note auction drew the strongest demand in 13 months from indirect bidders, who bought 52.7 percent of the securities.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Greg Storey

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