Treasuries Fall as Flagging Demand Poses Challenge for Bond Sale

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Demand for $16 billion in 30-year Treasury bonds will be tested at an auction Thursday as yields hover close to three-month lows.

Investors balked at adding to purchases Wednesday at a $24 billion sale of 10-year notes, as yields at the lowest since April 30 attracted the least bidding interest in more than six years. Treasuries erased gains as a rebound in demand for risker assets boosted equity prices and reduced the allure of government bonds.

Treasuries “are a bit overpriced given the fact we’ve got a bond auction tomorrow,” said Thomas di Galoma, the head of fixed-income rates and credit at ED&F Man Capital Markets in New York. “The Treasury market got overbought this morning.”

The benchmark U.S. 10-year note yield rose one basis point, or 0.01 percentage point, to 2.15 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The yield fell as low as 2.04 percent earlier, trading below the 200-day moving average, as China’s currency devaluation raised concern that other economies will follow to boost economic growth.

The 30-year bond yield rose 3 basis points to 2.84 percent after dropping as low as 2.72 percent. The previous auction of 30-year bonds on July 9 drew a yield of 3.084 percent.

‘Sticker Shock’

The 10-year notes were sold at a yield of 2.115 percent, the least since the April auction. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.40, the lowest since March 2009 and compared with an average of 2.67 at the past 10 sales.

“Yields have been dropping -- for that reason, buyers didn’t show up today,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 22 primary dealers that trade with the Fed. “There was a little sticker shock at 2.11” percent.

Indirect bidders, a group of investors that includes foreign central banks and mutual funds, purchased 60.1 percent at the auction, the most since May. Direct bidders purchased 5.8 percent, the least since August 2012. Primary dealers picked up 34 percent of the sale, the highest since January.

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