Bullish Treasury Buyers Abound at Auctions Before Fed Decision

  • Indirect bidders purchase record amount at 30-year bond sale
  • Demand at this week's auctions is the highest since June

Buyers piled into U.S. auctions of notes and bonds this week as investors were undeterred by the chance that the Federal Reserve may raise interest rates when it meets next week.

A group of buyers that includes foreign central banks and mutual funds purchased a record portion at Thursday’s $13 billion auction of 30-year bonds. As futures traders have pared bets that policy makers will raise rates this month, bond bulls are wagering that even if the Fed does move, low inflation will keep longer-term Treasury yields in check.

“The proximity to the Fed meeting could make longer term securities more attractive,” said Dan Mulholland, a senior trader in New York at Credit Agricole SA. “People think the curve will continue to flatten and the long end is the better place to be invested versus twos and fives.”

Treasury 10-year note yields rose for a third day, gaining two basis points, or 0.02 percentage point, to 2.22 percent as of 5 p.m. New York time, based on Bloomberg Bond Trader data. The 2 percent security due in August 2025 fell 6/32, or $1.88 per $1,000 face amount, to 98 1/32.

Higher Demand

Demand at this week’s $58 billion in three-, 10- and 30-year auctions was the highest since June for this series, as the bid-to-cover ratio rose to 2.88, according to data compiled by Bloomberg. The figure increased from 2.64 last month, which was the lowest since December.

Thursday’s bond auction drew a yield of 2.98 percent, the highest since July. Indirect bidders bought 66 percent, the most since Bloomberg started compiling the data in 2006.

A sale of benchmark 10-year notes on Wednesday drew a yield of 2.235 percent, the highest since June, as indirect bidders purchased 57.5 percent, compared with an average of 56.1 percent at the previous 10 offerings.

Futures traders have pared bets for liftoff at the Fed’s Sept. 16-17 meeting with the probability at 28 percent from 54 percent on Aug. 7. The chance of an increase in December was at 59 percent. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

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